**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**Form
      10-Q**







x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the
      quarterly period ended September 30, 2008




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                ACT OF 1934




For
      the
      transition period from ________ to ________




Commission
      file number   000-51006




**HARBIN
      ELECTRIC, INC.**


(Exact
      name of registrant as specified in its charter)




**Nevada**
            **98-0403396**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                Number)









**No. 9 Ha Ping Xi Lu, Ha Ping Lu Ji Zhong Qu**


**Harbin
      Kai Fa Qu, Harbin, People’s Republic of China 150060**


(Address
      of principal executive offices)




**Telephone:
      86-451-86116757**


(Issuer’s
      telephone number)







Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or 15(d) of the Securities Exchange Act of 1934, during the past 12 months
      (or for such shorter period that the registrant was required to file such
      reports), and (2) has been subject to such filing requirements for the past
      90
      days. Yes x No o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
                accelerated filero
            Accelerated
                filerx
            Non-accelerated
                filero





Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).


YesoNox







**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of November 6, 2008 :
      22,102,078 shares
      of
      common stock, par value $0.00001 per share.










**TABLE
      OF CONTENTS**





**Page****Part
                I. Financial Information**Item
                1. Financial Statements
            
            1Consolidated
                Balance Sheets
              As
                of September 30, 2008 (Unaudited) and December 31, 2007
            
            1Consolidated
                Statements of Income and Other Comprehensive Income
                (Unaudited)
              For
                the Three Months and Nine Months Ended September 30, 2008 and
                2007
            
            2Consolidated
                Statements of Stockholders’ Equity (Unaudited)
            
            3Consolidated
                Statements of Cash Flows (Unaudited)
              For
                the Nine Months Ended September 30, 2008 and 2007
            
            4Notes
                to the Consolidated Financial Statements (Unaudited)
            
            5Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            36Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            41Item
                4. Controls and Procedures
            
            41**Part
                II. Other Information**Item
                1. Legal ProceedingsItem
                1A. Risk Factors
            
            41Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            41Item
                3. Defaults upon Senior Securities
            
            45Item
                4. Submission of Matters to a Vote of Securities Holders
            
            45Item
                5. Other Information
            
            45Item
                6. Exhibits
            
            45Signatures
            
            46Index
                to Exhibits
            
            47










**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements (Unaudited)**




HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES





CONSOLIDATED
      BALANCE SHEETS


AS
      OF
      SEPTEMBER 30, 2008 AND DECEMBER 31, 2007


September 30,
                
                December 31,2008
                
                2007UNAUDITEDASSETSCURRENT
                    ASSETS:Cash
                    and cash equivalents
                
                $
                44,775,268
                
                $
                45,533,893Restricted
                    cash
                
                
                2,565,950
                
                
                -Accounts
                    receivable, net of allowance for doubtful accounts of
                    $866,357and
                    $116,238 as of September 30, 2008 and December 31, 2007,
                    respectively
                
                
                34,458,389
                
                
                23,216,543Inventories
                
                
                29,810,085
                
                
                2,570,929Other
                    receivables
                
                
                308,411
                
                
                326,639Advances
                    on inventory purchases
                
                
                1,205,759
                
                
                1,772,204Total
                    current assets
                
                
                113,123,862
                
                
                73,420,208PLANT
                    AND EQUIPMENT, net
                
                
                66,677,975
                
                
                23,858,035OTHER
                    ASSETS:Notes
                    receivable
                
                
                839,981
                
                
                -Debt
                    issuance costs, net
                
                
                1,734,262
                
                
                2,214,717Advances
                    on equipment purchases
                
                
                28,344,959
                
                
                24,328,386Goodwill
                    and Other Intangible assets, net
                
                
                19,615,845
                
                
                5,899,989Advances
                    on intangible assets
                
                
                1,477,630
                
                
                1,384,710Other
                    assets
                
                
                637,734
                
                
                397,263Cross
                    currency hedge receivable
                
                
                318,131
                
                
                145,945Deposit
                    in derivative hedge
                
                
                1,000,000
                
                
                1,000,000Total
                    other assets
                
                
                53,968,542
                
                
                35,371,010Total
                    assets
                
                $
                233,770,379
                
                $
                132,649,253LIABILITIES
                    AND SHAREHOLDERS' EQUITYCURRENT
                    LIABILITIES:Accounts
                    payable
                
                $
                8,077,243
                
                $
                263,314Short
                    term loan - bank
                
                
                4,864,475
                
                
                -Other
                    payables & accrued Liabilities
                
                
                3,617,153
                
                
                1,463,218Other
                    payables - related party
                
                
                -
                
                
                45,491Customer
                    deposits
                
                
                2,243,194
                
                
                333,253Taxes
                    payable
                
                
                1,092,020
                
                
                839,299Interest
                    payable
                
                
                -
                
                
                1,122,000Notes
                    payable - short term
                
                
                3,657,500
                
                
                -Total
                    current liabilities
                
                
                23,551,585
                
                
                4,066,575LONG
                    TERM LIABILITIES:Amounts
                    due to original shareholder
                
                
                5,120,500
                
                
                -Note
                    payable, net of debt discount of $13,321,255 and $16,878,269
                    as ofSeptember
                    30, 2008 and December 31, 2007, respectively
                
                
                32,678,745
                
                
                33,121,731FAIR
                    VALUE OF DERIVATIVE INSTRUMENT
                
                
                6,734,843
                
                
                10,844,372Total
                    liabilities
                
                
                68,085,673
                
                
                48,032,678COMMITMENTS
                    AND CONTINGENCIES
                
                
                -
                
                
                -SHAREHOLDERS'
                    EQUITY:Common
                    Stock, $0.00001 par value, 100,000,000 shares authorized,22,002,078
                    and 18,143,156 shares issued and outstandingas
                    of September 30, 2008 and December 31, 2007, respectively
                
                
                220
                
                
                181Paid-in-capital
                
                
                93,835,524
                
                
                44,970,589Retained
                    earnings
                
                
                44,375,591
                
                
                32,281,312Statutory
                    reserves
                
                
                16,258,030
                
                
                9,014,462Accumulated
                    other comprehensive income (loss)
                
                
                11,215,341
                
                
                (1,649,969
                )Total
                    shareholders' equity
                
                
                165,684,706
                
                
                84,616,575Total
                    liabilities and shareholders' equity
                
                $
                233,770,379
                
                $
                132,649,253
  The
          accompanying notes are an integral part of these consolidated
          statements.
  1
 
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
          STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
          THE
          THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
  (UNAUDITED)
 
 For the three months
                
                For the nine monthsended September 30,
                
                ended September 30,2008
                
                2007
                
                2008
                
                2007REVENUES
                
                $
                39,659,669
                
                $
                18,500,038
                
                $
                86,076,927
                
                $
                46,115,945COST
                    OF SALES
                
                
                25,887,701
                
                
                9,438,347
                
                
                50,089,348
                
                
                22,975,956GROSS
                    PROFIT
                
                
                13,771,968
                
                
                9,061,691
                
                
                35,987,579
                
                
                23,139,989RESEARCH
                    AND DEVELOPMENT EXPENSE
                
                
                130,360
                
                
                298,524
                
                
                414,731
                
                
                751,883SELLING,
                    GENERAL AND ADMINISTRATIVE EXPENSES
                
                
                3,122,419
                
                
                1,700,854
                
                
                8,193,199
                
                
                4,661,175INCOME
                    FROM OPERATIONS
                
                
                10,519,189
                
                
                7,062,313
                
                
                27,379,649
                
                
                17,726,931OTHER
                    EXPENSE (INCOME), NETOther
                    income, net
                
                
                (707,993
                )
                
                (13,462
                )
                
                (955,182
                )
                
                (786,180
                )Interest
                    expense, net
                
                
                2,058,543
                
                
                2,236,255
                
                
                5,536,054
                
                
                5,713,372Total
                    other expense, net
                
                
                1,350,550
                
                
                2,222,793
                
                
                4,580,872
                
                
                4,927,192INCOME
                    BEFORE PROVISION FOR INCOME TAXES
                
                
                9,168,639
                
                
                4,839,520
                
                
                22,798,777
                
                
                12,799,739PROVISION
                    FOR INCOME TAXES
                
                
                1,414,971
                
                
                75,298
                
                
                3,460,930
                
                
                75,298NET
                    INCOME
                
                
                7,753,668
                
                
                4,764,222
                
                
                19,337,847
                
                
                12,724,441OTHER
                    COMPREHENSIVE INCOME (LOSS)Foreign
                    currency translation adjustment
                
                
                400,094
                
                
                1,612,618
                
                
                8,755,781
                
                
                3,956,036Change
                    in fair value of derivative instrument
                
                
                4,359,163
                
                
                (3,101,455
                )
                
                4,109,529
                
                
                (7,047,406
                )COMPREHENSIVE
                    INCOME
                
                $
                12,512,925
                
                $
                3,275,385
                
                $
                32,203,157
                
                $
                9,633,071EARNINGS
                    PER SHAREBasicWeighted
                    average number of shares
                
                
                21,981,374
                
                
                17,226,880
                
                
                19,619,000
                
                
                16,810,065Earnings
                    per share
                
                $
                0.35
                
                $
                0.28
                
                $
                0.99
                
                $
                0.76DilutedWeighted
                    average number of shares
                
                
                23,075,834
                
                
                18,632,246
                
                
                20,911,930
                
                
                18,215,411Earnings
                    per share
                
                $
                0.34
                
                $
                0.26
                
                $
                0.92
                
                $
                0.70
 
 The
          accompanying notes are an integral part of these consolidated
          statements.
  2
 
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY
 
 Common stock
                
                Additional
                
                Retained earnings
                
                Accumulated otherPar
                
                paid-in
                
                Unrestricted
                
                Statutory
                
                comprehensiveShares
                
                value
                
                capital
                
                earnings
                
                reserves
                
                income (loss)
                
                TotalBALANCE,
                    December 31, 2006
                
                
                16,600,451
                
                $
                166
                
                $
                12,252,064
                
                $
                26,222,408
                
                $
                4,523,715
                
                $
                2,031,891
                
                $
                45,030,244Reclassification
                    of warrant liabilities to equity
                
                
                
                
                
                
                
                
                22,921,113
                
                
                (6,353,033
                )
                
                
                
                
                
                
                
                16,568,080Exercise
                    of warrants
                
                
                62,500
                
                
                1
                
                
                218,749
                
                
                
                
                
                
                
                
                
                
                
                218,750Stock
                    issued in acquisition
                
                
                473,354
                
                
                5
                
                
                6,499,995
                
                
                
                
                
                
                
                
                
                
                
                6,500,000Cashless
                    exercise of warrants / options
                
                
                531,650
                
                
                5
                
                
                (5
                )
                
                
                
                
                
                
                
                
                
                
                -Stock
                    based compensation
                
                
                
                
                
                
                
                
                705,723
                
                
                
                
                
                
                
                
                
                
                
                705,723Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                12,724,441
                
                
                
                
                
                
                
                
                12,724,441Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,956,036
                
                
                3,956,036Net
                    change related to cash flow hedges
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (7,047,406
                )
                
                (7,047,406
                )BALANCE,
                    September 30, 2007 (Unaudited)
                
                
                17,667,955
                
                
                177
                
                
                42,597,639
                
                
                32,593,816
                
                
                4,523,715
                
                
                (1,059,479
                )
                
                78,655,868Exercise
                    of stock warrants at $3.50
                
                
                92,698
                
                
                1
                
                
                324,442
                
                
                
                
                
                
                
                
                
                
                
                324,443Exercise
                    of stock warrants at $7.80
                
                
                150,000
                
                
                1
                
                
                1,169,999
                
                
                
                
                
                
                
                
                
                
                
                1,170,000Cashless
                    exercise of warrants / options
                
                
                232,503
                
                
                2
                
                
                (2
                )
                
                
                
                
                
                
                
                
                
                
                -Capital
                    contribution
                
                
                
                
                
                
                
                
                199,111
                
                
                
                
                
                
                
                
                
                
                
                199,111Stock
                    based compensation
                
                
                
                
                
                
                
                
                679,400
                
                
                
                
                
                
                
                
                
                
                
                679,400Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                4,178,243
                
                
                
                
                
                
                
                
                4,178,243Adjustment
                    to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                (4,490,747
                )
                
                4,490,747
                
                
                
                
                
                -Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,206,476
                
                
                3,206,476Net
                    change related to cash flow hedge
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,796,966
                )
                
                (3,796,966
                )BALANCE,
                    December 31, 2007
                
                
                18,143,156
                
                
                181
                
                
                44,970,589
                
                
                32,281,312
                
                
                9,014,462
                
                
                (1,649,969
                )
                
                84,616,575Exercise
                    of stock warrants at $3.50
                
                
                322,298
                
                
                3
                
                
                1,128,040
                
                
                
                
                
                
                
                
                
                
                
                1,128,043Exercise
                    of stock options at $3.10
                
                
                36,624
                
                
                1
                
                
                77,499
                
                
                
                
                
                
                
                
                
                
                
                77,500Stock
                    issuance for cash at $14.13
                
                
                3,500,000
                
                
                35
                
                
                46,290,708
                
                
                
                
                
                
                
                
                
                
                
                46,290,743Amortization
                    of stock compensation
                
                
                
                
                
                
                
                
                1,368,688
                
                
                
                
                
                
                
                
                
                
                
                1,368,688Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                19,337,847
                
                
                
                
                
                
                
                
                19,337,847Adjustment
                    to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                (7,243,568
                )
                
                7,243,568
                
                
                
                
                
                -Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,755,781
                
                
                8,755,781Net
                    change related to cash flow hedge
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,109,529
                
                
                4,109,529BALANCE,
                    September 30, 2008 (Unaudited)
                
                
                22,002,078
                
                $
                220
                
                $
                93,835,524
                
                $
                44,375,591
                
                $
                16,258,030
                
                $
                11,215,341
                
                $
                165,684,706
 
 The
          accompanying notes are an integral part of these consolidated
          statements.
  3
 
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 FOR
          THE
          NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)
 
 2008
                
                2007CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                19,337,847
                
                $
                12,724,441Adjustments
                    to reconcile net income to cashprovided
                    by (used in) operating activities:Depreciation
                
                
                1,124,953
                
                
                505,270Amortization
                    of intangible assets
                
                
                757,959
                
                
                241,351Amortization
                    of debt issuance costs
                
                
                480,455
                
                
                573,494Amortization
                    of debt discount
                
                
                3,557,014
                
                
                3,399,099Gain
                    on derivative instrument
                
                
                (318,131
                )
                
                (554,602
                )Stock
                    based compensation
                
                
                1,368,688
                
                
                705,723Change
                    in operating assets and liabilitiesAccounts
                    receivable
                
                
                (5,422,500
                )
                
                (1,880,732
                )Inventories
                
                
                1,616,743
                
                
                (988,989
                )Other
                    receivables
                
                
                4,090,907
                
                
                (282,972
                )Other
                    receivables - related parties
                
                
                (3,364
                )
                
                40,889Advances
                    on inventory purchases
                
                
                1,549,898
                
                
                (894,067
                )Other
                    assets
                
                
                (155,561
                )
                
                819,773Notes
                    receivable
                
                
                (489,321
                )
                
                -Accounts
                    payable
                
                
                294,195
                
                
                311,989Other
                    payables & accrued liabilities
                
                
                (2,943,839
                )
                
                9,343Other
                    payables - related party
                
                
                (47,572
                )
                
                24,589Customer
                    deposits
                
                
                (283,885
                )
                
                98,927Taxes
                    payable
                
                
                311,387
                
                
                196,511Interest
                    payable
                
                
                (1,122,000
                )
                
                (1,122,000
                )Net
                    cash provided by operating activities
                
                
                23,703,873
                
                
                13,928,037CASH
                    FLOWS FROM INVESTING ACTIVITIES:Cash
                    acquired through acquisition
                
                
                5,077,545
                
                
                -Decrease
                    of advances on intangible assets
                
                
                -
                
                
                (12,536,210
                )Increase
                    of advances on equipment purchases
                
                
                (2,330,053
                )
                
                -Additions
                    of intangible assets
                
                
                (258
                )
                
                (2,282,885
                )Additions
                    to plant and equipment
                
                
                (19,761,402
                )
                
                (7,384,918
                )Payment
                    to original shareholders for acquisition
                
                
                (49,850,250
                )
                
                -Net
                    cash used in investing activities
                
                
                (66,864,418
                )
                
                (22,204,013
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Increase
                    in restricted cash
                
                
                (2,517,605
                )
                
                -Net
                    proceeds from stock issuance 3.5 million shares
                
                
                46,290,743
                
                
                -Proceeds
                    received from conversion of warrants and options
                
                
                1,205,543
                
                
                218,750Deposit
                    to secure investment in cross currency hedge
                
                
                -
                
                
                (1,000,000
                )Proceeds
                    from cross currency hedge
                
                
                145,945
                
                
                554,602Repayment
                    of notes payable
                
                
                (4,000,000
                )
                
                -Repayment
                    of short term loan
                
                
                (716,850
                )
                
                -Net
                    cash provided by (used in) financing activities
                
                
                40,407,776
                
                
                (226,648
                )EFFECTS
                    OF EXCHANGE RATE CHANGE ON CASH
                
                
                1,994,144
                
                
                2,249,343DECREASE
                    IN CASH
                
                
                (758,625
                )
                
                (6,253,281
                )Cash
                    and cash equivalents, beginning of period
                
                
                45,533,893
                
                
                67,313,919Cash
                    and cash equivalents, end of period
                
                $
                44,775,268
                
                $
                61,060,638
 
 The
          accompanying notes are an integral part of these consolidated
          statements.
  4
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2008
 (UNAUDITED)
 
 **Note
        1 – Organization and description of business**
 
 Harbin
        Electric, Inc. (the “Company”) is a Nevada corporation, incorporated on July 9,
        2003. The Company currently through its indirect wholly-owned subsidiaries,
        Harbin Tech Full Electric Co., Ltd. (“Harbin Tech Full”) and Weihai Hengda
        Electric Motor (Group) Co., Ltd. (“Hengda”), designs, develops, engineers,
        manufactures, sells and services a wide array of electric motors including
        linear motors, specialty micro-motors, and industrial rotary motors, with
        focus
        on innovation, creativity, and value-added products. Products are sold in
        China
        and to the United States as discussed further in Note 10.
 
 On
        April
        9, 2007, the Company entered into an Agreement with Shelton Technology, LLC
        (“Shelton”), Shaotang Chen and Xiaogang Luo whereby the Company and Shelton
        agreed to work together through the Company’s newly formed, wholly-owned
        subsidiary, Advanced Automation Group, LLC (“AAG”) to design, develop and
        manufacture custom industrial automation controllers. The Company is required
        to
        contribute $3,000,000 to AAG in 3 installments: $1.2 million was paid on
        April
        16, 2007, $800,000 was paid on July 16, 2008 and $1,000,000 is due by March
        31,
        2009. Shelton
        contributed an exclusive worldwide royalty-free license for motorized automation
        technology; the term of the royalty-free license terms began on April 9,
        2007
        and ended at August 31, 2008. Shelton is entitled to receive 49% of any profits
        earned by AAG through the initial term of the Agreement. The Company and
        Shelton
        is currently in the process of drafting a new agreement to continue the project
        jointly.
 
 On
        June
        16, 2007, the Company through Harbin Tech Full entered into an asset purchase
        agreement with Harbin Taifu Auto Electric Co., Ltd., a company that was owned
        98% by the Company’s Chairman and Chief Executive Officer and 2% by other
        Company management. The aggregate purchase totaled $10,500,000 consisting
        of
        $4,000,000 in cash and $6,500,000 in newly issued Company common stock or
        473,354 shares, based on the average price for the immediately preceding
        fifteen
        consecutive trading days of $13.73. All assets will be used to produce electric
        motors with technical support and certified patents. An appraisal report
        dated
        July 16, 2007 assessed the fair market value of the acquired assets at RMB
        79,550,756, approximately $10.5 million. The Company recorded the asset
        acquisition at fair value; none of the purchase price was allocated to goodwill.
 
 In
        December 2006, the Company formed Shanghai Tech Full Electric Co., Ltd.,
        a
        wholly-owned subsidiary, to develop and manufacture specialty micro-motors
        and
        their components and accessories. The Company invested approximately $44.2
        million in the plant through September 30, 2008.
 
 On
        July
        10, 2008, the Company’s subsidiary, Harbin Tech Full acquired Hengda for an
        aggregate price of approximately $54.7 million (RMB 375 million) payable
        in
        cash. On March 27, 2008 Harbin Tech Full deposited approximately $0.7 million
        (RMB 5 million) toward the purchase price. The Company paid approximately
        $49.1
        million (RMB 335 million) in the third quarter of 2008 and expects to pay
        the
        remaining investment balance of $5.1 million (RMB 35 million) within two
        years
        from the Agreement. Hengda manufactures and distributes various industrial
        rotary motors such as high/low voltage motors, AC/DC motors and speed control
        motors.
  5
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 **Note
        2 – Accounting policies**
 
 Use
        of
        estimates
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        For
        example, the Company estimates the fair value of options using subjective
        assumptions including estimated length of time employees will retain their
        options before exercising them, forfeitures, and expected volatility of
        Company’s stock price over the expected term. Changes in these assumptions
        materially affect the estimated fair value and the resulting expense. Actual
        results could differ from management’s estimates.
 
 Management
        has included all normal recurring adjustments considered necessary to give
        a
        fair presentation of operating results for the periods presented. Interim
        results are not necessarily indicative of results for a full year. The
        information included in this Form 10-Q should be read in conjunction with
        information included in the 2007 annual report filed on Form 10-K.
 
 Basis
        of presentation
 
 The
        consolidated financial statements of Harbin Electric Inc. reflect the activities
        of the following subsidiaries:
 Place incorporated
              
              OwnershippercentageAdvanced
                  Electric Motors, Inc
              
              Delaware,
                USA
              
              
              100
              %Harbin
                  Tech Full Electric Co., Ltd
              
              Harbin,
                China
              
              
              100
              %Advanced
                  Automation Group, LLC
              
              Delaware,
                USA
              
              
              100
              %Shanghai
                  Tech Full Electric Co., Ltd
              
              Shanghai,
                China
              
              
              100
              %Weihai
                  Hengda Electric Motor Co. Ltd
              
              Weihai,
                China
              
              
              100
              %
 
 T he
        accompanying financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        All
        material intercompany transactions and balances have been eliminated in the
        consolidation.
  6
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Since
        Hengda was acquired in July 2008, its operating results for the three months
        ended September 30, 2008 were included in the consolidated financial
        statements.
 
 Concentration
        of risks
 
 The
        Company considers all highly liquid investments with original maturities
        of
        three months or less at the time of purchase to be cash equivalents, for
        cash
        flow statement purposes. Cash includes cash on hand and demand deposits in
        accounts maintained with state owned banks within the People’s Republic of China
        (“PRC”) and the United States. The
        Company maintains balances at financial institutions which, from time to
        time,
        may exceed Federal Deposit Insurance Corporation insured limits for the banks
        located in the Unites States. Balances at financial institutions or state
        owned
        banks within the PRC are not covered by insurance. As of September 30, 2008
        and
        December 31, 2007, the Company had deposits in excess of federally insured
        limits totaling $46,885,538 and $45,228,035, respectively. The Company has
        not
        experienced any losses in such accounts and believes it is not exposed to
        any
        significant risks on its cash in bank accounts.
 
 Three
        major customers accounted for approximately 37% of the net revenue for the
        nine
        months ended September 30, 2008, with each customer individually accounting
        for
        19%, 17% and 13%, respectively. At September 30, 2008, the total receivable
        balance due from these customers was $26,558,664, representing 77% of total
        accounts receivable. Five major customers accounted for 77% of the net revenue
        for the nine months ended September 30, 2007, with each customer individually
        accounted for 22%, 22%, 16%, 9% and 8%, respectively. At December 31, 2007,
        the
        total receivable balance due from these customers was $15,801,713, representing
        68% of total accounts receivable.
 
 Two
        major
        vendors provided approximately 37% of the Company’s purchases of raw materials
        for the nine months ended September 30, 2008, with each vendor individually
        accounting for 22% and 15%, respectively. Five vendors provided 82% of the
        Company’s purchase of raw materials for the nine months ended September 30,
        2007, with each vendor individually accounting for 29%, 21%, 14%, 12% and
        6%,
        respectively. The Company’s accounts payable to these vendors was $0 and $0 at
        September 30, 2008 and December 31, 2007, respectively.
 
 The
        Company's operations are carried out in the PRC. Accordingly, the Company's
        business, financial condition and results of operations may be influenced
        by the
        political, economic and legal environment in the PRC, and by the general
        state
        of the PRC's economy. The Company's operations in the PRC are subject to
        specific considerations and significant risks not typically associated with
        companies in the North America and Western Europe. These include risks
        associated with, among others, the political, economic and legal environments
        and foreign currency exchange. The Company's results may be adversely affected
        by changes in governmental policies with respect to laws and regulations,
        anti-inflationary measures, currency conversion and remittance abroad, and
        rates
        and methods of taxation, among other things.
  7
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Restricted
          cash
 
 Restricted
          cash represent amounts set aside by the Company in accordance with the
          Company’s
          debt agreements with certain financial institutions. These cash amounts
          are
          designated for the purpose of paying down the principal amounts owed to
          the
          financial institutions, and these amounts are held at the same financial
          institutions with which the Company has debt agreements in PRC. Due to
          the
          short-term nature of the Company’s debt obligations to these banks, the
          corresponding restricted cash balances have been classified as current
          in the
          consolidated balance sheets.
 Accounts
        receivable
 
 The
        Company’s business operations are conducted in the PRC. During the normal course
        of business, the Company extends unsecured credit to its customers. Management
        reviews its accounts receivable on a regular basis to determine if the allowance
        for doubtful accounts is adequate. An estimate for doubtful accounts is made
        when collection of the full amount is no longer probable. Known bad debts
        are
        written off against allowance for doubtful accounts when identified. The
        following table details the activity in the allowance for doubtful
        accounts.
 
 Allowance
                  for doubtful accounts at December 31, 2007
              
              $
              116,238Effect
                  of foreign currency translation gain
              
              
              7,800Bad
                  debt allowance carried over from Hengda
              
              
              742,319Allowance
                  for doubtful accounts at September 30, 2008
              
              $
              866,357
 
 Inventories
 
 Inventory
        is composed of raw material for manufacturing electrical motors, work in
        process
        and finished goods. Inventory is valued at the lower of cost or market value
        using the weighted average method. Management compares the cost of inventory
        with the market value and an allowance is made for writing down the inventory
        to
        its market value, if lower than cost.
 
 Plant
        and equipment
 
 Plant
        and
        equipment are stated at cost. Expenditures for maintenance and repairs are
        charged to earnings as incurred; additions, renewals and betterments are
        capitalized. When assets are retired or otherwise disposed of, the related
        cost
        and accumulated depreciation are removed from the respective accounts, and
        any
        gain or loss is included in operations. Depreciation of plant and equipment
        is
        provided using the straight-line method for substantially all assets with
        estimated lives as follows:
 
 Estimated Useful LifeBuildings
              20
                  yearsVehicle
              5
                  yearsOffice
                  equipment
              5
                  yearsProduction
                  equipment
              10
                  years
  8
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Construction
        in progress represents the costs incurred in connection with the construction
        of
        buildings or new additions to the Company’s plant facilities. No depreciation is
        provided for construction in progress until such time as the assets are
        completed and placed into service.
 
 The
        Company evaluates the carrying value of long-lived assets in accordance with
        SFAS 144 “Accounting for Impairment or Disposal of Long Lived Assets.” When
        estimated cash flows generated by those assets are less than the carrying
        amounts of the asset, the Company recognizes an impairment loss. Based on
        its
        review, the Company believes that, as of September 30, 2008 there were no
        impairments of its long-lived assets.
 
 Goodwill
        and other intangible assets
 
 The
        Company, in conjunction with its acquisition of Hengda, recorded goodwill
        totaling $12,942,592. In accordance with SFAS 142, “Goodwill and Other
        Intangible Assets”, goodwill is not amortized; however, management tests the
        carrying value of goodwill for impairment at least annually or more often
        when
        impairment indicators arise. The Company believes that, as of September 30,
        2008, there was no impairment of its goodwill.
  Intangible
          assets of the Company are reviewed each reporting period to determine whether
          their carrying value has become impaired. The Company considers assets
          to be
          impaired if the carrying value exceeds the future projected cash flows
          from
          related operations. The Company also re-evaluates the periods of amortization
          to
          determine whether subsequent events and circumstances warrant revised estimates
          of useful lives. As of September 30, 2008, the Company expects these assets
          to
          be fully recoverable.
 Stock-based
        compensation
 
 The
        Company records stock based compensation expense pursuant to FAS 123R, “Share
        Based Compensation.” The Company estimates the fair value of the award using the
        Black-Scholes Option Pricing Model. Under FAS 123R, the Company’s expected
        volatility assumption is based on the historical volatility of Company’s stock.
        The expected life assumption is primarily based on the simplified method
        of the
        terms of the options. The risk-free interest rate for the expected term of
        the
        option is based on the U.S. Treasury yield curve in effect at the time of
        grant.
 
 Stock
        compensation expense is recognized based on awards expected to vest, and
        there
        were no estimated forfeitures as the Company has a short history of issuing
        options. FAS 123R requires forfeitures to be estimated at the time of grant
        and
        revised in subsequent periods, if necessary, if actual forfeitures differ
        from
        those estimates.
 
 Revenue
        recognition
 
 The
        Company's revenue recognition policies are in compliance with Staff Accounting
        Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
        customers when a formal arrangement exists, the price is fixed or determinable,
        the delivery is completed, no other significant obligations of the Company
        exist
        and collectability is reasonably assured. For products that are required
        to be
        examined by customers, sales revenue is recognized after the customer
        examination is passed. Payments received before all of the relevant criteria
        for
        revenue recognition are recorded as customer deposits.
  9
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 In
        addition, revenue recognition could be negatively impacted by returns. For
        our
        linear motor and specialty micro-motor businesses, our products are custom
        products which are customer specific, and no returns are allowed. We warrant
        our
        product for repair, only in the event of defects for two years from the date
        of
        shipment. We charge such costs to cost of goods sold. For our newly acquired
        rotary motor business, our products are standardized products and returns
        are
        allowed within three days upon receipt of products by customers. We provide
        product warranty for repair one year from the date of shipment. Historically,
        the returns and defects have not been material. No sales were returned in
        the
        three or nine month periods ended September 2008 and 2007. Should returns
        increase in the future it would be necessary to adjust the estimates, in
        which
        case recognition of revenues could be delayed.
 
 Shipping
        and handling costs are included in selling, general and administrative costs
        and
        totaled $529,030 and $178,243 for the three months ended September 30, 2008
        and
        2007 and $962,917 and $402,990 for the nine months ended September 30, 2008
        and
        2007.
 
 Income
        taxes
 
 The
        Company utilizes Statement of Financial Accounting Standards (FAS) No. 109,
        "Accounting for Income Taxes," which requires the recognition of deferred
        tax
        assets and liabilities for the expected future tax consequences of events
        that
        have been included in the financial statements or tax returns. The
        Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
        Taxes”, as of January 1, 2007. A tax position is recognized as a benefit only if
        it is “more likely than not” that the tax position would be sustained in a tax
        examination, with a tax examination being presumed to occur. The amount
        recognized is the largest amount of tax benefit that is greater than 50%
        likely
        of being realized on examination. For tax positions not meeting the “more likely
        than not” test, no tax benefit is recorded. The adoption had no affect on the
        Company’s financial statements.
 
 Under
        this method, deferred income taxes are recognized for the tax consequences
        in
        future years of differences between the tax bases of assets and liabilities
        and
        their financial reporting amounts at each period end based on enacted tax
        laws
        and statutory tax rates applicable to the periods in which the differences
        are
        expected to affect taxable income. Valuation allowances are established,
        when
        necessary, to reduce deferred tax assets to the amount expected to be realized.
        There are no deferred tax amounts at September 30, 2008 and December 31,
        2007,
        respectively.
 
 The
        charge for taxation is based on the results for the quarter as adjusted for
        items, which are non-assessable or disallowed. It is calculated using tax
        rates
        that have been enacted or substantively enacted by the balance sheet
        date.
  10
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 The
        new
        Chinese Enterprise Income Tax (“EIT”) law was effective on January 1, 2008.
        Under the new Income Tax Laws of PRC, a company is generally subject to income
        tax at an effective rate of 25% on income reported in the statutory financial
        statements after appropriated tax adjustments. Harbin Tech Full is located
        in a
        specially designated region where Harbin Tech Full is subject to a 10% EIT
        rate.
 
 The
        previous Income Tax Laws of PRC which were abolished on December 31, 2007
        allowed foreign enterprises a two-year income tax exemption and a 50% income
        tax
        reduction for the following three years. The income tax rate after 50% reduction
        should not be lower than 10%. The new Chinese EIT law allows companies
        established before March 16, 2007 to continue to enjoy tax holiday treatment
        approved by local government for a grace period of the next 5 years or until
        the
        tax holiday term is completed, whichever is sooner. Harbin Tech Full was
        established before March 16, 2007 and thus entitled to tax holiday treatment.
        Harbin Tech Full is exempt from income tax from July 1, 2004 through December
        31, 2007, and has been approved to have its tax rate reduced by 50%, which
        is
        10%, from January 1, 2008 to December 31, 2010.
 
 The
        Company’s newly acquired subsidiary Hengda is currently at a 25% income tax
        rate.
 
 The
        following table reconciles the U.S. statutory rates to the Company’s effective
        tax rate for the three and nine months ended September 30, 2008 and
        2007:
 
 September 30,
              
              September 30,2008
              
              2007U.S.
                  Statutory rates
              
              
              34
              %
              
              34
              %Foreign
                  income not recognized in USA
              
              
              (34
              )
              
              (34
              )China
                  income taxes
              
              
              25
              
              
              33Tax
                  exemption
              
              
              (10
              )
              
              (33
              )Effective
                  income taxes
              
              
              15
              %
              
              -
              %
 
 The
        estimated tax savings for the three months ended September 30, 2008 and 2007
        amounted to $1,482,029 and $2,032,231. The net effect on earnings per share
        had
        the income tax been applied would decrease earnings per share from $0.35
        to
        $0.28 in 2008 and $0.28 to $0.16 in 2007. The estimated tax savings for the
        nine
        months ended September 30, 2008 and 2007 amounted to $4,652,412 and $7,367,542.
        The net effect on earnings per share had the income tax been applied would
        decrease earnings per share from $0.99 to $0.75 in 2008 and $0.76 to $0.32
        in
        2007.
 
 Harbin
        Electric, Inc., Advanced Electric Motors, Inc. and Advanced
        Automation Group, LLC were
        incorporated in the United States and have incurred net operating losses
        for
        income tax purposes for the nine months ended September 30, 2008. The net
        operating loss carry forwards for United States income taxes amounted to
        $22,239,508 which may be available to reduce future years’ taxable income. These
        carry forwards will expire, if not utilized, through 2026 and 2028. Management
        believes that the realization of the benefits from these losses appears
        uncertain due to the Company’s limited operating history and continuing losses
        for United States income tax purposes. Accordingly, the Company has provided
        a
        100% valuation allowance on the deferred tax asset benefit to reduce the
        asset
        to zero. The net change in the valuation allowance for the nine months ended
        September 30, 2008 was an increase of approximately $7,561,000. Management
        will
        review this valuation allowance periodically and make adjustments
        accordingly.
  11
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Value
        added tax
 
 Sales
        revenue represents the invoiced value of goods, net of a value-added tax
        (“VAT”). All of the Company’s products that are sold in the PRC are subject to a
        Chinese value-added tax at a rate of 17% of the gross sales price. This VAT
        may
        be offset by VAT paid by the Company on raw materials and other materials
        included in the cost of producing their finished product. The Company recorded
        VAT Payable and VAT receivable net of payments in the financial statements.
        The
        VAT tax return is filed offsetting the payables against the
        receivables.
 
 VAT
        on
        sales and VAT on purchases amounted to $14,853,031 and $9,563,848 for the
        nine
        months ended September 30, 2008 and $7,828,751 and $3,776,913 for the same
        period of 2007, respectively. VAT on sales and VAT on purchases amounted
        to
        $7,986,221 and $5,843,987 for the three months ended September 30, 2008 and
        $4,175,015 and $1,857,432 for the same period of 2007, respectively. Sales
        and
        purchases are recorded net of VAT collected and paid as the Company acts
        as an
        agent for the government. VAT taxes are not impacted by the income tax
        holiday.
 
 Taxes
        payable consisted of the following:
 
 September 30, 2008
              
              December 31, 2007VAT
                  tax payable
              
              $
              (147,215
              )
              $
              781,372Individual
                  income tax payable
              
              
              3,798
              
              
              2,049Corporation
                  income tax payable
              
              
              1,124,055
              
              
              -Others
                  misc. tax payable
              
              
              111,382
              
              
              55,878Total
              
              $
              1,092,020
              
              $
              839,299
 
 Advertising
        costs
 The
        Company expenses the cost of advertising as incurred in selling, general
        and
        administrative costs. The Company incurred $6,105 and $1,070 for the nine
        months
        ended September 30, 2008 and 2007, and $176 and $1,070 for the three months
        ended September 30, 2008 and 2007.
 
 Research
        and development costs
 
 Research
        and development costs are expensed as incurred. The costs of material and
        equipment that are acquired or constructed for research and development
        activities and have alternative future uses are classified as plant and
        equipment and depreciated over their estimated useful lives.
  12
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
  Fair
          value of financial instruments
 
 On
        January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements,” which
        defines fair value, establishes a three-level valuation hierarchy for
        disclosures of fair value measurement and enhances disclosure requirements
        for
        fair value measures. The carrying amounts reported in the balance sheets
        for
        current assets and current liabilities qualifying as financial instruments
        are a
        reasonable estimate of fair value because of the short period of time between
        the origination of such instruments and their expected realization and their
        current market rate of interest. The three levels are defined as
        follows:
 
 •
                Level 1
              inputs
                  to the valuation methodology are quoted prices (unadjusted) for
                  identical
                  assets or liabilities in active
                  markets.
 
 •
                Level 2
              inputs
                  to the valuation methodology include quoted prices for similar
                  assets and
                  liabilities in active markets, and inputs that are observable for
                  the
                  assets or liability, either directly or indirectly, for substantially
                  the
                  full term of the financial
                  instruments.
 
 •
                Level 3
              inputs
                  to the valuation methodology are unobservable and significant to
                  the fair
                  value.
 
 The
        Company did not identify any assets and liabilities that are required to
        be
        presented on the balance sheet at fair value in accordance with SFAS No.
        157.
 
 The
        Company analyzes all financial instruments with features of both liabilities
        and
        equity under SFAS 150, “Accounting for Certain Financial Instruments with
        Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock.” As of September 30, 2008, the outstanding principal on the
        Company’s note payable, evaluated under these accounting standards, amounted to
        $32,678,745. Based on management’s evaluation, no embedded derivatives and
        warrants were required to be recorded at fair value and marked-to-market
        at each
        reporting period. However, since there is no quoted or observable market
        price
        for the fair value of this note or similar notes, the Company used the level
        3
        inputs for its valuation methodology on this note, and used the Black Scholes
        Model to calculate the fair market value of the discount of the note. In
        addition, the Company does not anticipate any nonperformance risk, and
        determined that the fair value of the notes approximated the carrying
        value.
  13
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 As
        of
        September 30, 2008, the Company has a $6.7 million derivative instrument.
        Management obtains the fair value of the derivative instrument from a financial
        institution using Level 3 inputs since there is no observable market
        price.
 
 Derivative
        instrument
 
 The
        Company uses a cross currency interest rate swap, a derivative financial
        instrument, to hedge the risk of rising interest rates on their variable
        interest rate debt. This type of derivative financial instrument is known
        as a
        cash flow hedge. The
        Company accounts for this interest rate swap in accordance with FAS 133,
        “Accounting for Derivatives Instruments and Hedging Activity,” which requires
        the derivative to be carried on the balance sheet at fair value and to meet
        certain documentary and analytical requirements to qualify for hedge accounting
        treatment. The above derivative qualifies for hedge accounting under FAS
        133
        and, accordingly, changes in the fair value is reported in accumulated other
        comprehensive income, net of related income tax effects. Amounts included
        in
        accumulated other comprehensive income are reclassified into earnings when
        the
        hedged transaction effects earnings.
 
 At
        the
        inception of the transaction, the Company documents the relationship between
        hedging instruments and hedged items, as well as its risk management objective
        and the strategy for undertaking various hedge transactions. This process
        includes linking all derivatives designated to specific firm commitments
        of
        forecast transactions. The Company also documents its assessment, both at
        inception and on an ongoing basis, of whether the derivative financial
        instruments that are used in hedging transactions are highly effective in
        offsetting changes in fair values or cash flows of hedged items. Any portion
        deemed ineffective is recorded in earnings with the effective portion reflected
        in accumulated other comprehensive. Changes in the fair values of derivative
        instruments accounted for as cash flow hedges, to the extent they qualify
        for
        hedge accounting, are recorded in accumulated other comprehensive income.
        For
        the nine months ended September 30, 2008 and 2007, $4,109,529 was recorded
        as a
        gain, and $7,047,406 was recorded as a loss on the derivative instrument,
        respectively, in other comprehensive income (loss). For the three months
        ended
        September 30, 2008 and 2007, a $4,359,163 gain and $3,101,455 loss was recorded
        on the derivative instrument, respectively, in other comprehensive income
        (loss). As of September 30, 2008 and December 31, 2007, the fair value of
        the
        derivative instrument totaled $6,734,843 and $10,844,372, respectively, and
        was
        recorded in other comprehensive loss.
 
 Foreign
        currency transactions
 
 The
        reporting currency of the Company is the US dollar. The functional currency
        of
        Harbin Tech Full is the Chinese Renminbi. The financial statements of Harbin
        Tech Full are translated to United States dollars using quarter-end exchange
        rates as to assets and liabilities and average exchange rates as to revenues,
        expenses and cash flows. Capital accounts are translated at their historical
        exchange rates when the capital transaction occurred. Translation adjustments
        resulting from this process are included in accumulated other comprehensive
        income in the statement of shareholders’ equity. Transaction gains and losses
        that arise from exchange rate fluctuations on transactions denominated in
        a
        currency other than the functional currency are included in the results of
        operations as incurred.
  14
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Translation
        adjustments resulting from this process amounted to $400,094 and $1,612,618
        for
        the three months ended September 30, 2008 and 2007, respectively. Translation
        adjustments resulting from this process amounted to $8,755,781 and $3,956,036
        for the nine months ended September 30, 2008 and 2007, respectively. The
        balance
        sheet amounts with the exception of equity at September 30, 2008 were translated
        6.84 RMB to $1.00 as compared to 7.29 RMB at December 31, 2007. The equity
        accounts were stated at their historical exchange rate. The average translation
        rates applied to the income and cash flow statement amounts for the nine
        months
        ended September 30, 2008 and 2007 were 6.98 RMB and 7.65 RMB to $1.00,
        respectively.
 
 Transaction
        gains and losses that arise from exchange rate fluctuations on transactions
        denominated in a currency other than the functional currency are included
        in the
        results of operations as incurred. $465,560 and $0 were recognized during
        the
        nine months ended September 30, 2008, and 2007. The amount has recorded in
        the
        statement of operations during the period.
  In
        accordance with FAS 95, "Statement of Cash Flows," cash flows from the Company's
        operations is calculated based upon the local currencies. As a result, amounts
        related to assets and liabilities reported on the statement of cash flows
        will
        not necessarily agree with changes in the corresponding balances on the balance
        sheet.
 
 Change
        in accounting for registration rights penalties
 
 On
        January 1, 2007, the Company adopted FASB Staff Position No. EITF 00-19-2,
        “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”). FSP
        EITF 00-19-2 requires contingent obligations under a registration payment
        arrangement to be recognized and measured in accordance with FAS 5,
“Accounting for Contingencies”. FAS 5 requires loss contingencies to be accrued
        and expensed if they are probable and reasonably estimable.
 
 In
        connection with the convertible debt and warrants issued in October 2006,
        the
        Company filed a registration statement with the Securities and Exchange
        Commission to register for resale the common shares underlying the convertible
        debt and warrants. Initially, pursuant to EITF 00-19, “Accounting for Derivative
        Financial Instruments Indexed to, and Potentially Settle in, a Company’s Own
        Stock,” the existence of contingent cash penalties in the Registration Rights
        Agreement triggered derivative accounting treatment.
  15
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 As
        a
        result the Company recorded the warrants as a liability at their fair value
        on
        the date they were issued and then marked them to market each subsequent
        reporting period. Upon adoption of FSP EITF 00-19-2, any warrants originally
        classified as a liability under EITF 00-19 that would have been classified
        as
        equity without regard to the registration payment arrangement should be
        reclassified. The transition to the accounting treatment under FSP EITF 00-19-2
        is shown in the accompanying financial statements through 1) a cumulative-effect
        adjustment to the opening balance of retained earnings, as of January 1,
        2007
        and 2) reclassifying the warrants to equity at their fair value on the date
        of
        grant. The adjustment totaled $6,353,033 and was equal to the change in fair
        value of the warrants between October 6, 2006, the date the warrants were
        issued, and December 31, 2006, the last reporting period. Additionally, the
        warrants were reclassified as equity at $22,921,113, their fair value on
        October
        6, 2006. The adoption of FSP EITF 00-19-2 did not have an impact on financial
        statements prior to year 2007.
 
 Recent
        accounting pronouncements
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to
        choose to measure many financial instruments and certain other items at fair
        value that are not currently required to be measured at fair value. The SFAS
        159
        became effective for us on January 1, 2008. The Company chose not to elect
        the
        option to measure the fair value of eligible financial assets and liabilities.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of Accounting Research Bulletin
        No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
        ownership interests ** in
        subsidiaries held by parties other than the parent, the amount of consolidated
        net income attributable to the parent and to the noncontrolling interest,
        changes in a parent’s ownership interest and the valuation of retained
        non-controlling equity investments when a subsidiary is deconsolidated. The
        Statement also establishes reporting requirements that provide sufficient
        disclosures that clearly ** identify
        and distinguish between the interests of the parent and the interests of
        the
        non-controlling owners. SFAS 160 is effective for ** fiscal
        years beginning after December 15, 2008. The Company has not determined the
        effect that the application of SFAS 160 will ** have
        on
        its consolidated financial statements.
 
 In
        December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies
        to all transactions or other events in which an entity obtains control of
        one or
        more businesses, including those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without the transfer of
        consideration. This statement replaces FASB Statement No. 141 and applies
        to all
        business entities, including mutual entities that previously used the
        pooling-of-interests method of accounting for some business combinations.
        The
        Company believes that adoption of the FAS 141R will have a material effect
        on
        future acquisitions.
  16
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 In
        May
        2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
        Principles.” This Statement identifies the sources of accounting principles and
        the framework for selecting the principles to be used in the preparation
        of
        financial statements of nongovernmental entities that are presented in
        conformity with generally accepted accounting principles (GAAP) in the United
        States (the GAAP hierarchy). This Statement will not have an impact on the
        Company’s financial statements.
  In
        May
        2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee Insurance
        Contracts, an interpretation of FASB Statement 60.” The scope of this Statement
        is limited to financial guarantee insurance (and reinsurance) contracts,
        as
        described in this Statement, issued by enterprises included within the scope
        of
        Statement 60. Accordingly, this Statement does not apply to financial guarantee
        contracts issued by enterprises excluded from the scope of Statement 60 or
        to
        some insurance contracts that seem similar to financial guarantee insurance
        contracts issued by insurance enterprises (such as mortgage guaranty insurance
        or credit insurance on trade receivables). This Statement also does not apply
        to
        financial guarantee insurance contracts that are derivative instruments included
        within the scope of FAS 133, “Accounting for Derivative Instruments and Hedging
        Activities.” This Statement will not have an impact on the Company’s financial
        statements.
 
 In
        June
        2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
        an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
        07-5”). This Issue is effective for financial statements issued for fiscal years
        beginning after December 15, 2008, and interim periods within those fiscal
        years. Early application is not permitted. Paragraph 11(a) of Statement of
        Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
        Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
        definition of a derivative but is both (a) indexed to the Company’s own
        stock and (b) classified in stockholders’ equity in the statement of
        financial position would not be considered a derivative financial instrument.
        EITF 07-5 provides a new two-step model to be applied in determining whether
        a
        financial instrument or an embedded feature is indexed to an issuer’s own stock
        and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. The
        Company believes adopting this statement will have a material impact on the
        financial statements because among other things, any option or warrant
        previously issued and all new issuances denominated in US dollars will be
        required to be carried as a liability and marked to market each reporting
        period.
 
 In
        June
        2008, FASB issued EITF Issue 08-4, “Transition Guidance for Conforming Changes
        to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF 08-4 is to
        provide transition guidance for conforming changes made to EITF 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features
        or
        Contingently Adjustable Conversion Ratios”, that result from EITF 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS
        150, “Accounting for Certain Financial Instruments with Characteristics of both
        Liabilities and Equity”. This Issue is effective for financial statements issued
        for fiscal years ending after December 15, 2008. Early application is
        permitted. Management is currently evaluating the impact of adoption of
        EITF 08-4 on the accounting for the convertible notes and related warrants
        transactions.
  17
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 On
        October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
        Financial Asset When the Market for That Asset Is Not Active,” which clarifies
        the application of SFAS 157 in a market that is not active and provides an
        example to illustrate key considerations in determining the fair value of
        a
        financial asset when the market for that financial asset is not active. FSP
        157-3 became effective on October 10, 2008, and its adoption did not have
        a
        material impact on our financial position or results for the quarter ended
        September 30, 2008.
 
 Reclassifications **
 
 Certain
        prior period amounts have been reclassified to conform to the current period
        presentation. These reclassifications have no effect on net income or cash
        flows.
 
 **Note
        3 – Earnings per share**
 
 The
        Company reports earnings per share in accordance with the provisions of FAS
        128,
“Earnings Per Share.” FAS 128 requires presentation of basic and diluted
        earnings per share in conjunction with the disclosure of the methodology
        used in
        computing such earnings per share. Basic earnings per share excludes dilution
        and is computed by dividing
        income available to common stockholders by the weighted average common shares
        outstanding during the period. Diluted earnings per share takes into account
        the
        potential dilution that could occur if securities or other contracts to issue
        common stock were exercised and converted into common stock. The
        following is a reconciliation of the basic and diluted earnings per share
        computations:
 
 2008
              
              2007For
                  the three months ended September 30:Net
                  income for basic and diluted earnings per share
              
              $
              7,753,668
              
              $
              4,764,222Weighted
                  average shares used in basic computation
              
              
              21,981,374
              
              
              17,226,880Diluted
                  effect of stock options and warrants
              
              
              1,094,460
              
              
              1,405,366Weighted
                  average shares used in diluted computation
              
              
              23,075,834
              
              
              18,632,246Earnings
                  per share:Basic
              
              $
              0.35
              
              $
              0.28Diluted
              
              $
              0.34
              
              $
              0.26
  18
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 2008
              
              2007For
                  the nine months ended September 30:Net
                  income for basic and diluted earnings per share
              
              $
              19,337,847
              
              $
              12,724,441Weighted
                  average shares used in basic computation
              
              
              19,619,000
              
              
              16,810,065Diluted
                  effect of stock options and warrants
              
              
              1,292,930
              
              
              1,405,346Weighted
                  average shares used in diluted computation
              
              
              20,911,930
              
              
              18,215,411Earnings
                  per share:Basic
              
              $
              0.99
              
              $
              0.76Diluted
              
              $
              0.92
              
              $
              0.70
 
 At
        September 30, 2008 and September 30, 2007, all outstanding stock options
        and
        warrants have been included in the diluted earnings per share
        calculation.
 
 **Note
        4 – Inventories**
 
 Inventories
        consist of the following:
 
 September 30,2008
              
              December 31,2007(unaudited)Raw
                  and packing materials
              
              $
              10,389,805
              
              $
              925,085Work
                  in process
              
              
              8,464,541
              
              
              792,903Finished
                  goods
              
              
              10,955,739
              
              
              852,941Total
              
              $
              29,810,085
              
              $
              2,570,929
 
 **Note
        5 – Plant and equipment**
 
 Plant
        and
        equipment consist of the following:
 
 September 30,2008
              
              December 31,2007(unaudited)Buildings
              
              $
              24,138,173
              
              $
              5,668,808Office
                  equipment
              
              
              441,296
              
              
              378,849Production
                  equipment
              
              
              15,204,645
              
              
              4,333,797Vehicles
              
              
              526,983
              
              
              348,485Construction
                  in progress
              
              
              34,749,880
              
              
              14,575,134Total
              
              
              75,060,977
              
              
              25,305,073Less:
                  accumulated depreciation
              
              
              (8,383,002
              )
              
              (1,447,038
              )Property
                  and equipment, net
              
              $
              66,677,975
              
              $
              23,858,035
  19
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Construction
        in progress represents labor costs, material, capitalized interest incurred
        in
        connection with the construction of the new plant facility in Shanghai and
        the
        construction and installation of manufacturing equipment in Harbin manufacture
        plant. The management expects that the construction of the new plant will
        be
        completed by the end of 2008. No depreciation is provided for construction
        in
        progress until such time until the constructions are completed and are placed
        into service. Those assets will be subject to the depreciation based upon
        the
        nature of the fixed assets.
 
 Depreciation
        expense for the three months ended September 30, 2008 and 2007 amounted to
        $691,247 and $295,871, respectively. Depreciation expense for the nine months
        ended September 30, 2008 and 2007 amounted to $1,124,953 and $505,270,
        respectively.
 
 As
        of
        September 30, 2008 and December 31, 2007, a total of $2,152,295 and $980,154
        interest was capitalized into construction in progress, respectively.
 
 **Note
        6 – Goodwill and other intangible assets**
 
 Goodwill **–** the
        excess of the cost of an acquired entity over the net of the amounts assigned
        to
        assets acquired and liabilities assumed shall be recognized as goodwill.
        In
        conjunction with its acquisition of Hengda, the Company recorded totaling
        $12,942,592 goodwill as of September 30, 2008 according to a preliminary
        allocation of the purchase price which was based on a preliminary asset
        evaluation. Our estimates and assumptions are subject to change upon the
        management’s review of the final valuation.
 
 Land
        use
        rights - all land in the People’s Republic of China is government owned.
        However, the government grants the user a “land use right” (the Right) to use
        the land. The Company acquired land use rights during 2005 for $344,804.
        The
        Company has the right to use the land for 50 years and amortizes the Right
        on a
        straight line basis over 50 years.
 
 Patents **–** capitalized patent costs represent legal costs incurred to establish patents
        and
        the portion of the acquisition price paid attributed to patents upon the
        assets
        acquisition on July 16, 2007 as discussed further in Note 17. Capitalized
        patent
        costs are amortized on a straight method over the related patent terms generally
        from 6 to 10 years.
 
 The
        Company evaluates intangible assets for impairment, at least annually and
        whenever events or changes in circumstances indicate that the carrying value
        may
        not be recoverable from its estimated future cash flows. Recoverability of
        intangible assets, other long-lived assets, and goodwill is measured by
        comparing their net book value to the related projected undiscounted cash
        flows
        from these assets, considering a number of factors including past operating
        results, budgets, economic projections, market trends and product development
        cycles. If the net book value of the asset exceeds the related undiscounted
        cash
        flows, the asset is considered impaired, and a second test is performed to
        measure the amount of impairment loss. As of September 30, 2008, management
        believes there was no impairment.
  20
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Net
        intangible assets consist of the following:
 
 September 30, 2008
              
              December 31, 2007(unaudited)Goodwill
              
              $
              12,942,592
              
              $
              -Land
                  use rights
              
              
              1,567,468
              
              
              394,451Patents
              
              
              6,611,026
              
              
              6,202,854Less:
                  accumulated amortization
              
              
              (1,505,241
              )
              
              (697,316
              )Intangible
                  assets, net
              
              $
              19,615,845
              
              $
              5,899,989
 
 Amortization
        expense for the three months ended September 30, 2008 and 2007 amounted to
        $252,442 and $194,050, respectively. Amortization expense for the nine months
        ended September 30, 2008 and 2007 amounted to $757,959 and $241,351,
        respectively.
 
 **Note
        7 – Advance for intangible assets**
 
 The
        advances for intangible assets consisted of land use right prepayment. As
        of
        September 30, 2008 and December 31, 2007, advances for intangible assets
        amounted to $1,477,630 and $1,384,710, respectively.
 
 On
        September 8, 2006, Harbin Tech Full entered into an agreement ("Land Use
        Agreement") with Shanghai Lingang Investment and Development Company Limited
        ("Shanghai Lingang") with respect to Harbin Tech Full’s use of 40,800 square
        meters of State-owned land in the Shanghai Zhuqiao Airport Industrial Zone
        (the
        "Site").
 
 The
        term
        of the land use agreement is 50 years and the aggregate amount Harbin Tech
        Full
        shall pay to Shanghai Lingang is approximately $2.74 million ("Fee"), 55%
        or
        $1,384,710 has been paid with the balance payable upon Shanghai Lingang's
        completion of certain regulatory applications on behalf of Harbin Tech Full.
        The
        balance of the Fee is payable within seven days of receipt of a regulatory
        permit for work commencement. The Site will be used for industrial purposes.
        The
        Land Use Agreement requires Harbin Tech Full to invest approximately $16.5
        million in the site through December 2008. This investment amount includes
        fees,
        improvement costs, constructing a factory building and installing necessary
        equipment. Harbin Tech Full shall register a Sino-foreign joint venture company
        at the location of Shanghai Lingang, with taxes payable at the same location.
        Harbin Tech Full has agreed to compensate Shanghai Lingang for certain local
        taxes due to the local tax authority in connection with applicable tax
        generation requirements. As of September 30, 2008, the application of the
        regulatory permit for the land use is still in process.
  21
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 **Note
        8 – Advances to suppliers**
 
 The
        Company makes advances to certain vendors’ inventory purchases, construction
        projects and research and development expenses. The advances on inventory
        purchases were $1,205,759 and $1,772,204 as of September 30, 2008 and December
        31, 2007 respectively. Additionally, the Company made advances on equipment
        purchases amounted to $28,344,959 and $24,328,386 as of September 30, 2008
        and
        December 31, 2007, respectively.
 
 **Note
        9 – Other assets**
 
 Other
        assets consist of the following:
 
 September 30, 2008
              
              December 31, 2007(unaudited)Research
                  and development prepayment
              
              $
              563,055
              
              $
              380,754Deferred
                  expenses
              
              
              74,679
              
              
              16,509Total
              
              $
              637,734
              
              $
              397,263
  On
        August
        21, 2006, Harbin Tech Full entered into a joint research and development
        agreement (the “R&D Agreement”) with the Institute of Electrical Engineering
        of the Chinese Academy of Sciences (“IEECAS”) to produce a train system to be
        tested at the Beijing Airport railway line in the People’s Republic of China
        (“PRC”) by the end of 2008. The Agreement provides that the term of the project
        shall commence on August 2006 and terminate in early 2009.
 
 The
        R&D Agreement provides for a budget of approximately $3.65 million (RMB 25
        million), consisting of $2.19 miillion (RMB 15 million) to be invested by
        Harbin
        Tech Full and the remainder to be invested by IEECAS. Of this amount,
        approximately $1.46 million (RMB 10 million) has been invested to date by
        Harbin
        Tech Full. The balance of approximately $0.73 million (RMB 5 million) will
        be
        invested at the end of 2008 as testing and evaluation occurs. The Company
        has
        started to amortize the R&D prepayment based on the progress of the project.
        A total of $881,921 has been amortized and netted with R&D prepayment to the
        amount of $563,055.
 
 The
        research and development prepayment is being expensed based on the service
        incurred pursuant to SFAS 2 and EITF 07-3. A total of $0 and $591,073 has
        been
        expensed as research and development for the nine months ended September
        30,
        2008 and 2007 ad $0 and $274,770 for three months ended September 30, 2008
        and
        2007.
  22
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2008
 (UNAUDITED)
 
 **Note
        10** **–
        Additional product sales information**
 
 The
        Company has a single operating segment. The majority of the Company’s revenue
        was generated from local sales. Summarized
        financial information concerning the Company’s revenues based on geographic area are
        as
        follows:
  2008
              
              2007For
                  the three months ended September 30, 2008 and 2007:China
              
              $
              33,600,231
              
              $
              16,300,459International
              
              
              6,059,438
              
              
              2,199,579Total
                  sales
              
              
              39,659,669
              
              
              18,500,038Cost
                  of sales - China
              
              
              22,557,370
              
              
              8,560,332Cost
                  of sales - International
              
              
              3,330,331
              
              
              878,015Total
                  cost of sales
              
              
              25,887,701
              
              
              9,438,347Gross
                  profit
              
              $
              13,771,968
              
              $
              9,061,691For
                  the nine months ended September 30, 2008 and
                  2007:China
              
              $
              73,121,626
              
              $
              40,801,406International
              
              
              12,955,301
              
              
              5,314,539Total
                  sales
              
              
              86,076,927
              
              
              46,115,945Cost
                  of sales - China
              
              
              42,893,503
              
              
              20,719,516Cost
                  of sales - International
              
              
              7,195,845
              
              
              2,256,440Total
                  cost of sales
              
              
              50,089,348
              
              
              22,975,956Gross
                  profit
              
              $
              35,987,579
              
              $
              23,139,989
 
 **Note
        11 – Financing**
 
 On
        August
        29, 2006, the Company, Citadel Equity Fund Ltd. (“Citadel”) and Merrill Lynch
        International (“Merrill Lynch” and, together with Citadel, the “Investors”)
        entered a purchase agreement (the “Purchase Agreement”) relating to the purchase
        and sale of (a) $50 million aggregate principal amount of the Company's
        Guaranteed Senior Secured Floating Rate Notes (collectively, the “Notes”) and
        (b) fully detachable warrants (the “Warrants”) to purchase an aggregate of
        3,487,368 shares of our common stock. The transaction closed on August 30,
        2006.
 
 The
        Notes
        are governed by an indenture, dated August 30, 2006, entered into among the
        Company, AEM as guarantor, and The Bank of New York, as trustee for the Notes
        (the “Indenture”). Of the $50 million aggregate principal amount of the Notes,
        Citadel subscribed to $38 million of the principal amount of the Notes, which
        mature on September 1, 2012 (the “2012 Notes”), and Merrill Lynch subscribed to
        $12 million of the principal amount of the Notes, which mature on September
        1,
        2010 (the “2010 Notes”). Pursuant to the indenture, AEM has agreed, and all of
        the Company’s other existing and future subsidiaries (other than subsidiaries
        domiciled in the People's Republic of China) are obligated, to guarantee,
        on a
        senior secured basis, to the Investors and to the trustee the payment and
        performance of our obligations.
  23
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 The
        2010
        Notes bear interest, payable semi-annually in arrears commencing March 1,
        2007,
        at a rate equal to LIBOR (approximately 3.20% and 4.6% at September 30, 2008
        and
        December 31, 2007, respectively), plus 4.75%. The 2010 Notes bear an additional
        4% interest on any overdue principal and premium, if any, including interest
        on
        overdue interest, to the extent permitted by law.
 
 The
        2010
        Notes are redeemable at the option of the Company, in whole but not in part,
        at
        any time after September 1, 2007, initially at 106% of the principal amount
        thereof and declining to 100% of the principal amount on September 1, 2009.
        The
        2010 Notes are subject to mandatory redemption semi-annually commencing March
        1,
        2008 in the principal amount of $2,000,000 at a price equal to 100% of such
        principal amount. The Company repaid total of $4,000,000 during the nine
        months
        ended September 30, 2008. As of September 30, 2008, the outstanding balance
        is
        $46,000,000.
 
 The
        2012
        Notes bear interest, payable semi-annually in arrears commencing March 1,
        2007,
        at a rate equal to LIBOR plus 3.35%. See below for discussion of swap agreement
        changing the variable interest to a 7.2% RMB fixed rate. The 2012 Notes bear
        an
        additional 4% interest on any overdue principal and premium, if any, including
        interest on overdue interest, to the extent permitted by law. The 2012 Notes
        are
        redeemable at the option of the Company, in whole but not in part, at any
        time
        after September 1, 2007, initially at 106% of the principal amount thereof
        and
        declining to 100% of the principal amount on September 1, 2011. The 2012
        Notes
        are subject to mandatory redemption semi-annually commencing September 1,
        2009
        in the principal amount $2,400,000 on September 1, 2009, $3,800,000 on March
        1,
        2010, $9,900,000 on September 1, 2010 and March 1, 2011, and $4,000,000 on
        September 1, 2011, March 1, 2012 and September 1, 2012, in each instance
        at a
        price equal to 100% of such principal amount. Holders of the 2012 Notes may
        require the Company to repurchase such Notes at 100% of the principal amount
        thereof at any time after September 1, 2011.
 
 Upon
        a
        Change of Control (as defined in the indenture), holders of the Notes may
        require the Company to repurchase any or all such Notes at a price equal
        to
        102.5% of the principal amount thereof. The Company is required to offer
        to
        purchase Notes at a price equal to 100% of the principal amount thereof with
        the
        proceeds of certain asset sales. As security for the Notes, the Company and
        The
        Bank of New York, as collateral agent, entered into a share pledge agreement,
        dated August 30, 2006, to secure the Notes with all of the shares of AEM
        common
        stock held by the Company as collateral.
 
 The
        Warrants are governed by a warrant agreement, dated August 30, 2006, between
        AEM
        and The Bank of New York, as warrant agent. The Warrants consist of (i) six-year
        warrants to purchase an aggregate of 2,192,308 shares of our common stock,
        at an
        exercise price of $7.80 per share (the “First Tranche 2012 Warrants”), (ii)
        six-year warrants to purchase an aggregate of 525,830 shares of our common
        stock
        at an exercise price of $10.84 per share (the “Second Tranche 2012 Warrants”)
        and (iii) three-year warrants to purchase an aggregate of 769,230 shares
        of our
        common stock at an exercise price of $7.80 per share (the “2009 Warrants”).
 
 24
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 The
        First
        Tranche 2012 Warrants and the Second Tranche 2012 Warrants were issued to
        Citadel, and the 2009 Warrants were issued to Merrill Lynch. Each Warrant
        is
        exercisable at the option of the Warrant holder at any time through the maturity
        date of such Warrant.
 
 The
        warrant agreements contain a cashless exercise provision. During the nine-month
        period ended September 30, 2008, no warrants had been converted to common
        stock
        by cashless transaction.
 
 In
        addition, Mr. Tianfu Yang, the Company’s CEO, and Citadel entered into a voting
        agreement, dated August 30, 2006, pursuant to which Mr. Yang agreed to vote
        his
        shares of the capital stock of the Company to elect up to two members of
        the
        Company’s board of directors designated by Citadel. On
        March
        19, 2007, Citadel exercised its right to terminate that certain Voting Agreement
        dated August 30, 2006. The Company incurred no termination expenses or penalties
        in connection with the termination of the Voting Agreement .
 
 The
        Investors and Mr. Tianfu Yang also entered into a non-competition covenant
        and
        agreement, dated August 30, 2006, relating to Mr. Yang's employment and his
        ability to engage in a business that is competitive with our business for
        so
        long as any of the Notes remain outstanding. In connection with the issuance
        of
        the Notes, the Company filed a shelf registration statement which was declared
        effective February 9, 2007.
 
 On
        January 1, 2007, the Company adopted FASB Staff Position No. EITF 00-19-2,
        “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”). FSP
        EITF 00-19-2 requires contingent obligations under a registration payment
        arrangement to be recognized and measured in accordance with FAS 5, “Accounting
        for Contingencies”. FAS 5 requires loss contingencies to be accrued and expensed
        if they are probable and reasonably estimable.
  In
        connection with the debt and warrants issued in August 2006, the Company
        filed a
        registration statement with the Securities and Exchange Commission to register
        for resale the common shares underlying the convertible debt and warrants.
        Initially, pursuant to EITF 00-19, “Accounting for Derivative Financial
        Instruments Indexed to, and Potentially Settle in, a Company’s Own Stock,” the
        existence of contingent cash penalties in the Registration Rights Agreement
        triggered derivative accounting treatment. As a result, the Company recorded
        the
        warrants as a liability at their fair value on the date they were issued
        and
        then marked them to market each subsequent reporting period. Upon adoption
        of
        FSP EITF 00-19-2, any warrants originally classified as a liability under
        EITF
        00-19 that would have been classified as equity, without regard to the
        registration payment arrangement, should be reclassified.
  25
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 The
        transition to the accounting treatment under FSP EITF 00-19-2 is shown in
        the
        accompanying financial statements through 1) a cumulative-effect adjustment
        to
        the opening balance of retained earnings, as of January 1, 2007 and 2)
        reclassifying the warrants to equity at their fair value on the date of grant.
        The adjustment totaled $6,353,033 was equal to the change in fair value of
        the
        warrants between October 6, 2006, the date the warrants were issued, and
        December 31, 2006, the last reporting period. Additionally, the warrants
        were
        reclassified as equity at $22,921,113, their fair value on October 6, 2006.
        The
        adoption of FSP EITF 00-19-2 did not have an impact on prior year financial
        statements.
 
 The
        fair
        value of the warrants upon issuance totaled $22,921,113, was treated as a
        discount on the carrying value of the debt, and is being amortized over the
        life
        of the loan using the effective interest method. $2,302,871 and $2,266,066
        was
        amortized to interest expense for the nine months ended September 30, 2008
        and
        2007, respectively. The carrying value of the debt is as follows:
 
 September 30,
                2008
              
              December 31,
                2007(unaudited)Principal
                  amount
              
              $
              46,000,000
              
              $
              50,000,000Less
                  unamortized discount
              
              
              (13,321,255
              )
              
              (16,878,269
              )Long-term
                  debt, net of unamortized discount
              
              $
              32,678,745
              
              $
              33,121,731
 
 Debt
        issuance costs at a total of $2,954,625 are carried in other assets and are
        amortized over the life of the loan using the effective interest method.
        $480,455 and $573,494 was amortized to interest expense for the nine months
        ended September 30, 2008 and 2007, respectively. As of September 30, 2008
        and
        December 31, 2007, the unamortized debt issuance costs totaled $1,734,262
        and
        $2,214,717, respectively.
 
 The
        Company has short term loan of $4,864,475 which is purchased during acquisition
        of new subsidiary Hengda, as follows:
 
 September 30,
                2008
              
              December 31,
                2007(unaudited)Loan
                  from Agriculture Bank, due October 2008. Monthly interest-only
                  payments at
                  8.748% per annum, secured by buildings
              
              $
              2,999,150
              
              $
              -Loan
                  from Agriculture Bank, due January 2009. Monthly interest-only
                  payments at
                  8.964% per annum, secured by buildings
              
              
              694,925
              
              
              -Loan
                  from Weihai Commercial Bank, due August 2008. Monthly interest-only
                  payments at 8.424% per annum, secured by buildings
              
              
              585,200
              
              
              -Loan
                  from Weihai Commercial Bank, due September 2008. Monthly interest-only
                  payments at 8.748% per annum, secured by buildings
              
              
              585,200
              
              
              -Short
                  term loan - bank
              
              $
              4,864,475
              
              $
              -
 
 26
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Net
        interest expense for the three and nine months ended September 30, 2008 and
        2007
        was comprised of the following:
 
 2008
                (Unaudited)
              
              2007
                (Unaudited)For
                  the three months ended September 30, 2008 and 2007:Amortization
                  of debt discount
              
              $
              1,254,143
              
              $
              1,133,033Amortization
                  of debt issuance costs
              
              
              128,509
              
              
              308,333Interest
                  expense
              
              
              1,020,633
              
              
              1,603,459Interest
                  earned on cash deposits
              
              
              (219,342
              )
              
              (551,605
              )Interest
                  earned on derivative instrument
              
              
              (125,400
              )
              
              (256,965
              )Interest
                  expense, net
              
              $
              2,058,543
              
              $
              2,236,255For
                  the nine months ended September 30, 2008 and 2007:Amortization
                  of debt discount
              
              $
              3,557,014
              
              $
              3,399,099Amortization
                  of debt issuance costs
              
              
              480,457
              
              
              554,551Interest
                  expense
              
              
              2,445,852
              
              
              3,178,578Interest
                  earned on cash deposits
              
              
              (629,138
              )
              
              (864,254
              )Interest
                  earned on derivative instrument
              
              
              (318,131
              )
              
              (554,602
              )Interest
                  expense, net
              
              $
              5,536,054
              
              $
              5,713,372
 
 **Note
        12 – Derivative instrument**
 
 The
        Company's operations are exposed to a variety of global market risks, including
        the effect of changing currency exchange rate and interest rates. These exposure
        are managed, in part, with the use of a financial derivative. The Company
        uses
        financial derivatives only to hedge exposures in the ordinary course of business
        and dose not invest in derivative instruments for speculative
        purposes.
 
 27
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Effective
        April 17, 2007, the Company entered into a cross currency interest rate swap
        agreement with Merrill Lynch exchanging the LIBOR plus 3.35% variable rate
        interest payable on the $38 million principal amount or 2012 Notes for a
        7.2%
        (3.6% semi-annually) RMB fixed rate interest. The agreement requires semi-annual
        payments on March 1 and September 1 through the maturity of the agreement
        on
        September 1, 2012. Merrill Lynch required the Company to deposit $1,000,000
        with
        them to secure the agreement. The deposit may be increased to $2,500,000
        if the
        exchange rate for Renminbi to USD falls below 6.5, and to $4,000,000 if the
        exchange rate falls below 5.5. This swap is designated and qualified as a
        cash
        flow hedge.
 
 The
        fair
        value of this swap agreement April 02, 2007 (inception date) was a payable
        of
        $5,387,487, and at September 30, 2008 and December 31, 2007, was a payable
        of
        $6,734,843 and $10,844,372, respectively. During the nine months ended September
        30, 2008, the Company recognized $318,131, which was recorded as a gain from
        derivative transactions, and the Company received $145,945 proceeds from
        cross
        currency hedge for the nine months ended September 30, 2008.
 
 Changes
        of cross currency hedge receivable are as follows,
 
 Balance
                  at December 31, 2007
              
              $
              145,945Proceeds
                  from cross currency hedge
              
              
              (145,945
              )Gain
                  from derivative transactions
              
              
              318,131Balance
                  at September 30, 2008
              
              $
              318,131
 
 **Note
        13 -Other expenses and income, net**
 
 Other
        income and expense for the three months and nine months ended September 30,
        2008
        and 2007 consist of the following:
 
 For the three months
                ended September 30,
              
              For the nine months
                ended September 30,2008
              
              2007
              
              2008
              
              2007Finance/interest
                  expense
              
              $
              572,330
              
              
              1,603,459
              
              $
              1,997,550
              
              
              3,178,578Interest
                  income
              
              
              (344,741
              )
              
              (808,570
              )
              
              (947,269
              )
              
              (1,418,856
              )Amortization
                  of debt discount
              
              
              1,254,143
              
              
              1,133,033
              
              
              3,557,014
              
              
              3,399,099Amortization
                  of debt issuance cost
              
              
              128,509
              
              
              308,333
              
              
              480,457
              
              
              554,551Other
                  non-operating income
              
              
              (752,192
              )
              
              (18,886
              )
              
              (1,091,980
              )
              
              (788,814
              )Other
                  non-operating expense
              
              
              44,200
              
              
              5,424
              
              
              136,798
              
              
              2,634Foreign
                  currency transaction (gain)/loss
              
              
              448,301
              
              
              -
              
              
              448,302
              
              
              -Total
                  other expense, net
              
              $
              1,350,550
              
              
              2,222,793
              
              $
              4,580,872
              
              
              4,927,192
 
 28
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 **Note
        14 – Accumulated other comprehensive income**
 
 The
        components of accumulated other comprehensive income as follows:
 
 Balance,
                  January 1, 2007
              
              $
              2,031,891Foreign
                  currency translation gain
              
              
              3,956,036Change
                  in fair value of derivative instrument
              
              
              (7,047,406
              )Balance,
                  September 30, 2007
              
              
              (1,059,479
              )Foreign
                  currency translation gain
              
              
              3,206,476Change
                  in fair value of derivative instrument
              
              
              (3,796,966
              )Balance,
                  December 31, 2007
              
              
              (1,649,969
              )Foreign
                  currency translation gain
              
              
              8,755,781Change
                  in fair value of derivative instrument
              
              
              4,109,529Balance
                  at September 30, 2008
              
              $
              11,215,341
 
 **Note
        15 – Business combinations**
 
 On
        July
        10, 2008, the Company’s subsidiary, Harbin Tech Full entered into an Equity and
        Assets Transfer Agreement (the “Agreement”) with respect to the acquisition by
        Harbin Tech Full of Weihai Hengda Electric Motor (Group) Co. Ltd., a PRC
        corporation (“Hengda”) for an aggregate price of approximately $54.7 million
        (RMB 375 million) payable in cash. The results of operations of the acquired
        companies are included in the consolidated statement of income from the
        acquisition date to the quarter ended September 30, 2008.
 
 Amounts
        due to original shareholders represent the unpaid portion for the acquisition
        of
        Hengda (see Note 15 for the acquisition). As of September 30, 2008, Harbin
        Tech
        Full had payables of $5.1 million (RMB 35 million), the Company expects to
        pay
        approximately $4.4 million (RMB 30 million) within two quarters from the
        acquisition date and pay the remaining $700,000 (RMB 5 million) within two
        years
        from the acquisition date.
 
 The
        following table summarizes the net book value and the fair value of the assets
        acquired and liabilities assumed at the date of acquisition:
 
 Net Book
                Value
              
              Fair ValueCurrent
                  assets
              
              $
              43,367,072
              
              $
              43,367,072Property,
                  plant and equipment, net
              
              
              21,558,220
              
              
              22,175,189Other
                  non current assets
              
              
              1,201,828
              
              
              1,201,828Goodwill
              
              
              -
              
              
              12,942,592Total
                  assets
              
              
              66,127,120
              
              
              79,686,681Total
                  liabilities
              
              
              24,910,141
              
              
              24,910,141Net
                  assets
              
              $
              41,216,979
              
              $
              54,776,540
 
 29
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 The
        Company determined the $41.2 million fair value of the acquired assets of
        Hengda
        based on a preliminary asset evaluation by an independent appraisal. Pursuant
        to
        SFAS 141, Business Combination, the excess of the cost of an acquired entity
        over the net of the amounts assigned to assets acquired and liabilities assumed
        shall be recognized as goodwill. As a result, the $12.9 million of goodwill
        was
        due to the acquisition purchase price over the fair value of the assets
        acquired. Our estimates and assumptions are subject to change upon management’s
        review of the final asset evaluation. The final evaluation is expected to
        be
        completed as soon as possible, but not later than one year from the acquisition
        date.
 
 **Pro
        Forma**
 
 The
        following unaudited pro forma condensed income statement for the nine months
        ended September 30, 2008 and 2007 and the three months ended September 30,
        2008
        and 2007 were prepared under generally accepted accounting principles as
        if the
        acquisition of Hengda had occurred on January 1, 2007. The pro forma information
        may not be indicative of the results that actually would have occurred if
        the
        acquisition had been in effect from and on the date indicated.
 
 For the nine months ended
                September 30,
              
              For the three months ended
                September 30,2008
              
              2007
              
              2008
              
              2007Sales
              
              $
              112,098,185
              
              $
              75,771,800
              
              $
              39,659,669
              
              $
              29,700,555Cost
                  of Goods Sold
              
              
              71,963,114
              
              
              46,692,240
              
              
              25,887,701
              
              
              18,242,439Gross
                  Profit
              
              
              40,135,071
              
              
              29,079,560
              
              
              13,771,968
              
              
              11,458,116Operating
                  Expenses
              
              
              11,464,880
              
              
              10,782,133
              
              
              4,603,329
              
              
              4,326,776Other
                  expense, net
              
              
              28,670,191
              
              
              18,297,427
              
              
              9,168,639
              
              
              7,131,340Income
                  Tax
              
              
              4,614,026
              
              
              1,849,075
              
              
              1,414,971
              
              
              815,598Net
                  Income
              
              $
              24,056,165
              
              $
              16,448,352
              
              $
              7,753,668
              
              $
              6,315,742
 
 **Note
        16 – Commitments and contingencies**
 
 The
        Company enters into non-cancelable purchase commitments with its vendors.
        As of
        September 30, 2008 and December 31, 2007, the Company was obligated under
        the
        non cancelable commitments to purchase materials totaling to $1,756,328 and
        $1,686,222, respectively. These commitments are short-term and expire within
        one
        year. The Company has experienced no losses on these purchase commitments
        over
        the years.
 
 As
        discussed in more detail in Note 1, the Company entered into an agreement
        with
        Shelton Technology, LLC on April 9, 2007. Under the terms of the agreement,
        the
        Company is required to contribute $3,000,000 to AAG in 3 installments: $1.2
        million was paid on April 16, 2007, $800,000 was paid on July 16, 2008 and
        $1,000,000 by March 31, 2009.
 
 30
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 As
        discussed in Note 12, the Company entered into a swap agreement that required
        a
        $1,000,000 deposit to secure the transaction. If the exchange rate for Renminbi
        to US Dollars drops below certain levels, the Company will be required to
        deposit up to $4,000,000.
 
 As
        discussed in Note 12, the 2010
        Notes are subject to mandatory redemption semi-annually commencing March
        1, 2008
        in the principal amount $2,000,000 at price equal to 100% of such principal
        amount. The 2012 Notes are subject to mandatory redemption semi-annually
        commencing September 1, 2009 in the principal amount $2,400,000 on September
        1,
        2009, $3,800,000 on March 1, 2010, $9,900,000 on September 1, 2010 and March
        1,
        2011, and $4,000,000 on September 1, 2011, March 1, 2012 and September 1,
        2012,
        in each instance at price equal to 100% of such principal amount. Holders
        of the
        2012 Notes may require the Company to repurchase such Notes at 100% of the
        principal amount thereof at any time after September 1, 2011.
 
 The
        Company is subject to a 5 year lease agreement dated February 1, 2004 for
        office
        space requiring monthly payments of $2,700. The agreement expires on April
        30,
        2009. On April 30, 2008, the Company signed a Lease Cancellation Agreement
        with
        the landlord to terminate the lease, effective May 1, 2008. Pursuant to the
        Lease Cancellation Agreement, the Company paid a cancellation fee of $16,412,
        which is 50% of the future obligations.
 
 **Note
        17 – Shareholders’ equity**
 
 Private
        placement.
 
 On
        June
        24, 2008, Harbin Electric, Inc. sold 3.5 million shares of common stock,
        at
        $14.13 per share for a total aggregate purchase price of $49,455,000. The
        Company agreed to file a registration statement with the Securities Exchange
        Commission registering the shares within 30 days of closing and to achieve
        the
        effectiveness of the registration within an agreed upon period. The Company
        agreed to pay penalties up to 10% of the proceeds if the registration was
        not
        filed or made effective timely. The Company filed Form S-3 on July 24, 2008,
        which was declared effective on October 28, 2008, and therefore, was not
        subject
        to any penalties. The Company paid a placement fee equal to 6% of the proceeds
        totaling $2,967,258.
 
 Warrants
 
 Following
        is a summary of warrant activity:
 
 Outstanding
                  as of January 1, 2007
              
              
              3,967,368Granted
              
              
              -Forfeited
              
              
              -Exercised
              
              
              (1,269,710
              )Outstanding
                  as of September 30, 2007
              
              
              2,697,658Granted
              
              
              -Forfeited
              
              
              -Exercised
              
              
              (242,698
              )Outstanding
                  as of December 31, 2007
              
              
              2,454,960Granted
              
              
              -Forfeited
              
              
              (2,504
              )Exercised
              
              
              (322,298
              )Outstanding
                  as of September 30, 2008
              
              
              2,130,158
  31
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 Following
        is a summary of the status of warrants outstanding at September 30, 2008:
 
 Outstanding Warrants
              
              Exercisable WarrantsExercise Price
              
              Number
              
              Average
                Remaining
                Contractual Life
              
              Average
                Exercise Price
              
              Number
              
              Average
                Remaining
                Contractual Life$                 10.84
              
              
              366,697
              
              
              4.27
              
              $
              10.84
              
              
              366,697
              
              
              4.27$                   7.80
              
              
              1,528,846
              
              
              1.27
              
              $
              7.80
              
              
              1,528,846
              
              
              1.27$                   7.80
              
              
              234,615
              
              
              1.21
              
              $
              7.80
              
              
              234,615
              
              
              1.21Total
              
              
              2,130,158
              
              
              
              
              
              
              
              
              2,130,158
 
 **Options**
 
 In
        May
        2005, the Board of Directors of the Company adopted and approved the 2005
        Stock Option Plan (the “Plan”) which authorized the issuance of up
        to 1,500,000 shares under the Plan. The fair values of stock options
        granted to employees and the independent directors were estimated at the
        date of
        grant using the Black-Scholes option-pricing model with the following
        assumptions:
 
 **Expected**
              
              **Expected**
              
              **Dividend**
              
              **Risk Free**
              
              **Grant Date****Life**
              
              **Volatility**
              
              **Yield**
              
              **Interest Rate**
              
              **Fair Value**Employees
                  - 2005
              
              
              3.0
                  yrs
              
              
              66
              %
              
              0
              %
              
              4.00
              %
              $
              3.93Directors
                  - 2005
              
              
              5.0
                  yrs
              
              
              66
              %
              
              0
              %
              
              4.13
              %
              $
              3.10Employees
                  - 2006
              
              
              5.0
                  yrs
              
              
              66
              %
              
              0
              %
              
              4.13
              %
              $
              8.10Directors
                  - 2006
              
              
              5.0
                  yrs
              
              
              66
              %
              
              0
              %
              
              4.13
              %
              $
              8.10Employees
                  - 2007
              
              
              3.0
                  yrs
              
              
              81
              %
              
              0
              %
              
              4.50
              %
              $
              12.40Executives
                  - 2007
              
              
              3.0
                  yrs
              
              
              77
              %
              
              0
              %
              
              4.50
              %
              $
              15.60
 
 32
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 The
        Company determined its expected volatility and dividend yield based on the
        historical changes in stock price and dividend payments. The risk-free interest
        rate for the expected term of the option is based on the U.S. Treasury yield
        curve in effect at the time of grant. The Company determined the option’s
        expected life based on historical exercise behavior.
 
 Following
        is a summary of stock option activity:
 
 Options
                Outstanding
              
              Weighted
                Average
                Exercise
                  Price
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  as of January 1, 2007
              
              
              900,000
              
              $
              6.11
              
              $
              1,863,000Granted
              
              
              25,000
              
              
              12.40
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -Outstanding
                  as of September 30, 2007
              
              
              925,000
              
              $
              6.28
              
              $
              9,453,500Granted
              
              
              260,000
              
              
              15.60Forfeited
              
              
              (66,667
              )
              
              3.93Exercised
              
              
              (357,083
              )
              
              5.96Outstanding
                  as of December 31, 2007
              
              
              761,250
              
              $
              9.82
              
              $
              12,370,313Granted
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -Exercised
              
              
              (40,000
              )
              
              3.10Outstanding
                  as of September 30, 2008
              
              
              721,250
              
              $
              10.19
              
              $
              1,298,250
 
 Following
        is a summary of the status of options outstanding at September 30, 2008:
 
 Outstanding Options
              
              Exercisable OptionsExercise Price
              
              Number
              
              Average
                Remaining
                Contractual Life
              
              Average
                Exercise Price
              
              Number
              
              Average
                Remaining
                Contractual Life$             3.10
              
              
              110,000
              
              
              1.33
              
              $
              3.10
              
              
              110,000
              
              
              1.33$             8.10
              
              
              326,250
              
              
              2.33
              
              $
              8.10
              
              
              261,250
              
              
              2.33$           12.40
              
              
              25,000
              
              
              1.67
              
              $
              12.40
              
              
              14,613
              
              
              1.67$           15.60
              
              
              260,000
              
              
              2.21
              
              $
              15.60
              
              
              86,667
              
              
              2.21Total
              
              
              721,250
              
              
              
              
              
              
              
              
              442,530
 
 Stock
        compensation expense recognized is based on awards expected to vest, and
        there
        were no estimated forfeitures as the Company has a short history of issuing
        options. SFAS 123R requires forfeitures to be estimated at the time of grant
        and
        revised in subsequent periods, if necessary, if actual forfeitures differ
        from
        those estimates. For the nine months ended September 30, 2008 and 2007, stock
        compensation expense related to warrants and options issued amounted to
        $1,070,020 and $606,167, respectively.
 
 33
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
 **Note
        18 – Supplemental disclosure of cash flows**
 
 The
        Company prepares its statements of cash flows using the indirect method as
        defined under the FAS 95. The following information relates to non-cash
        investing and financing activities for 2008 and 2007.
 
 Total
        interest paid amounted to $3,216,311 and $4,578,780 for the nine months ended
        September 30, 2008 and 2007, respectively.
 
 Total
        income tax paid amounted to $3,288,915 and $14,009 for the nine months ended
        September 30, 2008 and 2007, respectively.
 
 On
        July
        19, 2007, the Company issued 473,354
        shares of common stock valued
        at
        $6,500,000 plus $4,000,000 of cash to acquire
        the assets of Harbin Taifu Auto Electric Co., Ltd., owned 98% by the CEO
        and 2%
        by management. The fair values of assets acquired are as follows:
 
 Items
              
              Book value
              
              Assessed Fair ValueCurrent assets
              
              $
              2,186,039
              
              $
              2,186,039Equipment
              
              
              2,987,640
              
              
              2,987,640Patent
                  rights
              
              
              1,223,522
              
              
              5,326,321Total
                  assets acquired
              
              $
              6,397,201
              
              $
              10,500,000
 
 On
        July
        12, 2007, the Company’s CEO transferred 280,000 of his own shares to the Company
        employees and consultants. The shares vest over 5 to 10 years starting July
        12,
        2007. The Company valued the shares at $13.73 per share, based on the average
        price for the immediately proceeding fifteen consecutive trading days before
        June 16, 2007, the date when the Company and Harbin Tech Full entered into
        the
        asset purchase agreement with Harbin Taifu Auto Electric Co., Ltd, the trading
        price of the stock on the date of transfer, as a capital contribution totaling
        $3,844,904 by the CEO, the value was amortized over the vesting period. For
        the
        three months ended September 30, 2008, a total of $99,556 has been expensed
        and
        included in the stock compensation expense. For the nine months ended September
        30, 2008, a total of $298,668 has been expensed and included in the stock
        compensation expense.
 
 **Note
        19 – Employee pension**
 
 Regulations
        in the People’s Republic of China require the Company to contribute to a defined
        contribution retirement plan for all employees. All Joint Venture employees
        are
        entitled to a retirement pension amount calculated based upon their salary
        at
        their date of retirement and their length of service in accordance with a
        government managed pension plan. The PRC government is responsible for the
        pension liability to the retired staff. The employee pension in Harbin generally
        includes two parts: the first part to be paid by the Company is 20% of the
        employees’ actual salary in the prior year. If the average salary falls below
        $1,165 for each individual, $1,165 will be used as the basis. The other part,
        paid by the employees, is 8% of actual salary with the same minimum requirement.
        The Company made $195,614 and $27,394 contributions of employment benefits,
        including pension for the nine months ended September 30, 2008 and 2007.
        The
        Company made a $146,336 and $10,767 in contribution of employment benefits,
        including pension, for the three months ended September 30, 2008 and
        2007.
 
 34
 HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2008
 (UNAUDITED)
  **Note
        20 – Legal proceedings**
 
 From
        time
        to time, the Company becomes involved in various lawsuits and legal proceedings
        which arise in the ordinary course of business.
 
 In
        June
        2006, an action was filed against the Company by Leong Sing Lye in the United
        States District Court for the District of Nevada, seeking specific performance
        of the Company's alleged obligation to issue 228,000 shares of Common Stock
        and
        warrants to purchase 38,400 shares of common stock, or, in the alternative,
        the
        value of securities alleged to be owed to Mr. Lye under, or, monetary damages
        allegedly arising from, a so-called Appointment Agreement pursuant to which
        Mr.
        Lye alleges to have been appointed the Company's Consultant of Corporate
        Strategy, as well as court costs and reasonable attorneys' fees. The Company
        has
        filed an answer to Mr. Lye's complaint denying the material allegations thereof
        and a counterclaim against Mr. Lye for fraud and related claims. The Company
        intends to vigorously defend itself against Mr. Lye's claim, if not withdrawn,
        and pursue its counterclaim. The parties are in the discovery process. The
        Company has filed a motion for summary judgment to eliminate portions of
        Mr.
        Lye's case and Mr. Lye has filed a cross-motion.
 
 On
        January 22, 2008, the Company, without admitting any guilt, made an offer
        of
        Judgment to settle the claim against the Company and in favor of Mr. Lye
        in full
        and final resolution of all claims and counterclaims for the sum of $1 million.
        On February 1, 2008, Mr. Lye accepted the Company’s offer. On February 14, 2008,
        the Company made the $1 million payment in full to Mr. Lye to settle the
        case.
  35


**Item
      2.**  **Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





**INFORMATION
      REGARDING FORWARD LOOKING STATEMENTS**





The
      following discussion should be read in conjunction with the unaudited condensed
      consolidated financial statements and notes thereto set forth in Item 1 of
      this
      Quarterly Report. In addition to historical information, this discussion and
      analysis contains forward-looking statements that relate to future events and
      expectations and, as such, constitute forward-looking statements.
      Forward-looking statements include those containing such words as” anticipates,”
“believes,” “estimates,” “expects,” “hopes,” “targets,” “should,” will,” “will
      likely result,” “forecast,” “outlook,” “projects” or similar expressions. Such
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors that may cause actual results, performance or achievements of
      the
      Company to be materially different from those expressed or implied in the
      forward-looking statements.





**OVERVIEW**




We
      were
      incorporated under the laws of the state of Nevada and, along with our
      wholly-owned subsidiaries, are headquartered in Harbin, China. We design,
      develop, manufacture, supply, and service a wide range of electric motors,
      with
      a focus on innovation, creativity, and value-added products. Our major product
      lines include linear motors, automobile specialty micro-motors, and industrial
      rotary motors. Our products are purchased by a broad range of customers,
      including those involved in the oil services, factory automation, packaging,
      logistic systems, food industries, and mass transportation systems. We sell
      our
      products principally in China, but also internationally in North America, and
      to
      a lesser degree in Southeast Asia and Africa.





We
      are
      subject to risks common to companies operating in China, including risks
      inherent in our distribution and commercialization efforts, uncertainty of
      foreign regulatory and marketing approvals and laws, reliance on key customers,
      enforcement of patent and proprietary rights, the need for future capital and
      retention of key employees. We cannot provide assurance that we will generate
      revenues or achieve and sustain profitability in the future.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





We
      believe that the application of the following accounting policies, which are
      important to our financial position and results of operations, require
      significant judgments and estimates on the part of management. Our critical
      accounting policies and estimates present an analysis of the uncertainties
      involved in applying a principle, while the accounting policies note to the
      financial statements (Note 2) describe the method used to apply the accounting
      principle.





***Accounts
      Receivable***





We
      use
      estimates in determining our allowance for bad debts that are based on our
      historical collection experience, current trends, credit policy and a percentage
      of our accounts receivable by aging category. In determining these percentages,
      we review historical write-offs in our receivables. In determining the
      appropriate reserve percentages, we also review current trends in the credit
      quality of our customers, as well as changes in our internal credit
      policies.





We
      maintain reserves for potential credit losses on accounts receivable. Management
      reviews the composition of accounts receivable and analyzes historical bad
      debts, customer concentrations, customer credit worthiness, current economic
      trends and changes in customer payment patterns to evaluate the adequacy of
      these reserves. Reserves are recorded primarily on a specific identification
      basis. Additional allowances for doubtful accounts may be required if there
      is
      deterioration in past due balances, if economic conditions are less favorable
      than anticipated, or for customer-specific circumstances, such as financial
      difficulty.





Reserves
      for potential credit losses were $866,357 as of September 30, 2008 and $116,238
      as of December 31, 2007. We incurred transaction losses resulting from
      collection of our oversea receivables. For the nine-months ended September
      30,
      2008, the transaction loss was $465,560.





***Inventories***




Inventory
      levels are based on projections of future demand and market conditions.
      Inventories are stated at cost, not in excess of market, using the weighted
      average cost method. Any sudden decline in demand and/or rapid product
      improvements and technological changes can result in excess and/or obsolete
      inventories. Because most of our products are customized and unique to a
      particular customer, there is a risk that we will forecast inventory needs
      incorrectly and purchase or produce excess inventory. As a result, actual demand
      may differ from forecasts, and such differences, if not managed, may have a
      material adverse effect on future results of operations due to required
      write-offs of excess or obsolete inventory. To mitigate such exposure, we
      require a binding purchase order or a signed agreement by our customer agreeing
      to pay for and take possession of finished goods inventory parts for the
      duration of the agreement.





On
      an
      ongoing basis, inventories are reviewed for potential write-down for estimated
      obsolescence or unmarketable inventories equal to the difference between the
      costs of inventories and the estimated net realizable value based upon forecasts
      for future demand and market conditions. To the extent we increase our reserves
      for future periods, operating income will be reduced.





36




***Revenue
      Recognition***




Our
      revenue recognition policies comply with Staff Accounting Bulletin (SAB) 104
      and
      SFAS 48. SAB 104 requires that revenue can only be recognized when it is
      realized or realizable and earned. Revenue generally is realized or realizable
      and earned when all four of the following criteria have been met: (1) persuasive
      evidence of an arrangement exists; (2) delivery has occurred or services
      rendered; (3) the price is fixed and determinable; and (4) collectability is
      reasonably assured. For products that are required to be examined by customers
      upon receiving shipments, sales revenue is recognized after the customer
      examination is passed.




In
      addition, our revenue recognition could be negatively impacted by returns.
      For
      our linear motor and specialty micro-motor businesses, our products are custom
      products which are customer specific, and no returns are allowed. We warrant
      our
      product for repair, only in the event of defects for two years from the date
      of
      shipment. We charge such costs to cost of goods sold. For our newly acquired
      rotary motor business, our products are standardized products and returns are
      allowed within three days upon receipt of products by customers. We provide
      product warranty for repair one year from the date of shipment. Historically,
      the returns and defects have not been material.





***Stock-Based
      Compensation***




The
      Company accounts for stock-based compensation in accordance with the fair value
      recognition provisions of SFAS 123R. The Company uses the Black-Scholes-Merton
      option-pricing model which requires the input of highly subjective assumptions.
      These assumptions include estimating the length of time employees will retain
      their stock options before exercising them (“expected term”), the estimated
      volatility of the Company’s common stock price over the expected term and the
      number of options that will ultimately not complete their vesting requirements
      (“forfeitures”). Changes in the subjective assumptions can materially affect the
      estimate of fair value of stock-based compensation and consequently, the related
      amount recognized on the consolidated statements of earnings.





***Derivative
      Financial Instruments***





The
      Company uses a cross-currency interest rate swap to hedge its exposure under
      the
      2012 Notes. The derivative is initially recognized in the balance sheet at
      cost
      and subsequently re-measured at fair value each reporting period. Changes in
      the
      fair values of derivatives accounted for as cash flow hedges, to the extent
      they
      qualify for hedge accounting, are recorded in accumulated other comprehensive
      income, net of deferred taxes; changes in fair values of derivative financial
      instruments not qualifying as hedges are reported in income.





At
      the
      inception of a hedge transaction, the Company documents the relationship between
      hedging instruments and hedged items, as well as its risk management objective
      and the strategy for undertaking the hedge. This process includes linking all
      derivatives designated to specific firm commitments of forecast transactions.
      The Company also documents its assessment, both at inception and on an ongoing
      basis, of whether the derivative financial instruments that are used to hedge
      are highly effective in offsetting changes in fair values or cash flows of
      hedged items.





***Fair
      Value of Financial Instruments***





SFAS
      No.
      157, Fair Value Measurements, defines fair value, establishes a three-level
      valuation hierarchy for disclosures of fair value measurement and enhances
      disclosures requirements for fair value measures. The Company adopted SFAS
      No.
      157 and did not identify any assets and liabilities that are required to be
      presented on the balance sheet at fair value in accordance with SFAS No.
      157.





***Recent
      Accounting Pronouncements***





In
      June
      2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
      an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
      07-5”). This Issue is effective for financial statements issued for fiscal years
      beginning after December 15, 2008, and interim periods within those fiscal
      years. Early application is not permitted. Paragraph 11(a) of Statement of
      Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
      Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
      definition of a derivative but is both (a) indexed to the Company’s own stock
      and (b) classified in stockholders’ equity in the statement of financial
      position would not be considered a derivative financial instrument. EITF 07-5
      provides a new two-step model to be applied in determining whether a financial
      instrument or an embedded feature is indexed to an issuer’s own stock and thus
      able to qualify for the SFAS 133 paragraph 11(a) scope exception. The Company
      believes adopting this statement will have a material impact on the financial
      statements because among other things, any option or warrant previously issued
      and all new issuances denominated is US dollars will be required to be carried
      as a liability and marked to market each reporting period.





On
      October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
      Financial Asset When the Market for That Asset Is Not Active,” which clarifies
      the application of SFAS 157 in a market that is not active and provides an
      example to illustrate key considerations in determining the fair value of a
      financial asset when the market for that financial asset is not active. FSP
      157-3 became effective on October 10, 2008, and its adoption did not have a
      material impact on our financial position or results for the quarter ended
      September 30, 2008.





37




**RESULTS
      OF OPERATIONS**





THREE
      MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,
      2007





***Results
      of Operations***





For
      the
      three months ended September 30, 2008, we generated net revenues of $39.66
      million, more than doubled the total revenues of $18.50 million for the three
      months ended September 30, 2007. In July, the Company acquired Weihai Hengda
      Electric Motor (Group) Co. Ltd, (“Hengda”), an industrial rotary motor business.
      This is the first quarter that our financial results included the newly acquired
      company. The revenue increase reflects approximately $14.81 million sales from
      this new business. Sales of automobile specialty micro-motors increased 38%
      from
      2007. Our new tower-type oil pump was also a major contributor to the revenue
      growth. We delivered a total of 64 units of tower-type oil pump during the
      third
      quarter of 2008 while none during the corresponding quarter of last year.





The
      following table shows the approximate percentage revenue contribution by each
      major product line and corresponding average gross profit margin for the three
      months ended September 30, 2008 and 2007. The decline of the overall gross
      profit margin year-over-year was primarily due to changes in product mix,
      particularly attributable to the lower gross margin of the rotary motor business
      and, to a lesser degree, the specialty micro-motor business.




**Three
                  Months Ended September 30, 2008**
              
              **Three
                  Months Ended September 30, 2007****Product
                  Line**
              
              
              **%
                  of Total Revenues**
              
              
              **Gross
                  Profit Margin**
              
              
              **%
                  of Total Revenues**
              
              
              **Gross
                  Profit Margin**Linear
                  Motors and Related Systems
              
              
              35
              %
              
              54
              %
              
              58
              %
              
              53
              %Specialty
                  Micro-Motors
              
              
              23
              %
              
              41
              %
              
              32
              %
              
              43
              %Rotary
                  Motors
              
              
              38
              %
              
              13
              %
              
              0
              %
              
              NAOthers
              
              
              4
              %
              
              49
              %
              
              10
              %
              
              48
              %**Total**
              
              
              100
              %
              
              35
              %
              
              100
              %
              
              49
              %




Product
      sales to markets outside China were 15.3% and 11.9% of total sales for the
      third
      quarters of 2008 and 2007, respectively.





Operating
      profit increased 49%, to $10.52 million, in the third quarter of 2008, from
      $7.06 million in the third quarter of 2007. The significant growth in operating
      profit was primarily attributable to higher sales from the automobile
      micro-motors business and tower-type oil pumps, as well as the new rotary motor
      business acquired in July 2008. Operating margin declined to 26.5% in the third
      quarter of 2008, from 38.2% for the same quarter of the prior year, mainly
      due
      to lower gross profit margin in our new industrial rotary motor business.





Selling,
      general and administrative expense (“SG&A”) was $3.12 million for the
      quarter, compared to $1.70 million in the same quarter of 2007. The dollar
      increase in SG&A was primarily a result of business expansion, increased
      sales activities, higher stock based compensation expense and other
      administration expenses, as well as expenses associated with the new business
      acquired in July 2008. Shipping and handling costs increased to $529,030 for
      the
      quarter ended September 30, 2008, from $178,243 for the same quarter in 2007
      due
      to increased sales activities. Stock based compensation expense totaled $456,223
      and $212,807 for the quarters ended September 30, 2008 and 2007, respectively,
      a
      114% increase. However, as a percentage of total sales, the Company’s total
      SG&A expenses declined to 7.9% in this quarter from 9.2% in the same quarter
      last year.





Net
      income for the 2008 third quarter was $7.75 million, compared to $4.76 million
      for the 2007 third quarter, a 63% increase. Earnings per diluted share increased
      to $0.34 in the 2008 third quarter from $0.26 in the 2007 third quarter, with
      an
      additional 4.5 million weighted average number of shares.





***Interest
      expense***





Net
      interest expense was $2.06 million and $2.24 million for the three months ended
      September 30, 2008 and 2007, respectively. Non-cash amortization expense of
      debt
      discount and debt issuance cost totaled $1.38 million and $1.44 million for
      the
      quarters ended September 30, 2008 and 2007, respectively.




During
      the third quarters of 2008 and 2007, the Company recorded interest income of
      $125,400 and $256,965, respectively, on the cross currency interest rate swap
      agreement with Merrill Lynch. Interest income on cash deposits amounted to
      $219,342 and $551,605 for the third quarters ended September 30, 2008 and 2007,
      respectively.





38


***Income
      Tax***





According
      to the Provisional Regulations of the People's Republic of China on Income
      Tax
      and the approval by the local tax bureau and the Management Regulation of Harbin
      Economic and Technological Development Zone, from July 1, 2004 through December
      31, 2007, our wholly owned PRC subsidiary, Harbin Tech Full Electric Co., Ltd.
      (“Harbin Tech Full”), was exempted from income tax. A reduced income tax rate of
      10% has been approved for January 1, 2008 to December 31, 2010, and the local
      government has further approved a 2.5% tax rebate. This rebate is included
      in
      Non-operating income, net. Hengda is subject to the 25% standard income tax
      rate
      beginning January 1, 2008.





The
      income tax provision was $1.41 million for the 2008 third quarter versus $75,298
      for the 2007 third quarter. The income tax that Harbin Tech Full began to pay
      on
      earnings starting on January 1, 2008 has resulted in a reduction in our growth
      of net earnings compared to previous periods.





NINE
      MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
      2007





***Results
      of Operations***





For
      the
      nine months ended September 30, 2008, we generated net revenues of $86.08
      million, compared to $46.12 million for the nine months ended September 30,
      2007, an 87% increase, including approximately $14.81 million sales from Hengda,
      acquired in July 2008. Revenue from automobile specialty micro-motors business
      grew 352%. Our new tower-type oil pump also contributed to revenue growth.
      We
      delivered a total of 183 units during the 2008 nine-month period, compared
      with
      none in 2007.





The
      following table shows the approximate percentage revenue contribution by each
      major product line and its corresponding average gross profit margin for the
      2008 and 2007 nine-month periods. The decline of the overall gross profit margin
      year-over-year was primarily due to changes in product mix.




**Nine Months
                Ended September 30, 2008**
            
            **Nine Months
                Ended September 30, 2007****Product
                Line**
            
            
            **%
                of Total Revenues**
            
            
            **Gross
                Profit Margin**
            
            
            **%
                of Total Revenues**
            
            
            **Gross
                Profit Margin**Linear
                Motors and Related Systems
            
            
            43
            %
            
            55
            %
            
            70
            %
            
            53
            %Specialty
                Micro-Motors
            
            
            34
            %
            
            40
            %
            
            13
            %
            
            43
            %Rotary
                Motors
            
            
            17
            %
            
            13
            %
            
            0
            %
            
            NAOthers
            
            
            6
            %
            
            49
            %
            
            17
            %
            
            47
            %**Total**
            
            
            100
            %
            
            42
            %
            
            100
            %
            
            50
            %




Product
      sales to markets outside China amounted to 15.1% of total sales in the
      nine-months ended September 30, 2008, compared with 11.5% in the nine-months
      ended September 30, 2007.





Operating
      profit was $27.38 million in the nine-months ended September 30, 2008, compared
      with $17.73 million in the nine-months ended September 30, 2007, representing
      54.5% growth, attributable primarily to our automobile micro-motors business,
      tower-type oil pumps, and the rotary motor business acquired in July 2008.
      Operating margin declined to 31.8% in 2008, versus 38.4% for the prior year
      period, mainly due to lower gross profit margin in the rotary motor business
      and
      to a lesser degree in our automobile micro-motors business.





SG&A
      was $8.19 million for the nine-months ended September 30, 2008, compared to
      $4.66 million in the same period of 2007. The year-over-year dollar increase
      in
      SG&A was primarily a result of business expansion, increased sales
      activities, higher stock based compensation expense and other administration
      expenses, as well as expenses associated with the new rotary motor business.
      Shipping and handling costs more than doubled to $962,917 for the nine-months
      ended September 30, 2008 from $402,990 for the same period in 2007, due to
      increased sales activities. Stock based compensation totaled $1.37 million
      and
      $0.71 million for the nine-months ended September 30, 2008 and 2007,
      respectively, a 93% increase. However, as a percentage of total sales, the
      Company’s total SG&A expenses decreased to 9.5% in this nine-month period
      comparing to 10.1% in the same period last year.




Net
      income for the nine-month period in 2008 was $19.34 million compared to $12.72
      million for the nine-month period in 2007, representing a year-over-year
      increase of 52%. Earnings per diluted share increased to $0.92 in the
      nine-months ended September 30, 2008 from $0.70 in the nine-months ended
      September 30, 2007, with an additional 2.7 million weighted average number
      of
      shares.




***Interest
      expense***





Net
      interest expense was $5.54 million and $5.71 million for the nine-months ended
      September 30, 2008 and 2007, respectively. Non-cash amortization expense of
      the
      debt discount and debt issuance cost totaled $4.04 and $3.95 million for the
      nine-months ended September 30, 2008 and 2007, respectively. This non-cash
      expense reduced earnings by $0.19 and $0.22 per diluted share, respectively,
      for
      the two periods.




39


During
      the nine-months ended September 30, 2008 and 2007, the Company recorded interest
      income of $318,131 and $554,602, respectively, on the Merrill Lynch cross
      currency interest rate swap agreement. Interest income on cash deposits amounted
      to $629,138 and $864,254, for the nine-months ended September 30, 2008 and
      2007,
      respectively.





***Income
      Tax***





The
      Company recorded a provision for income tax of $3.46 million for the nine months
      ended September 30, 2008 versus $75,298 for the nine months period in 2007.
      The
      significant increase in income tax resulted from expiration of Harbin Tech
      Full’s income tax exemption and the 25% provision of income taxes from
      Hengda..





**Liquidity
      and Capital Resources**





As
      of
      September 30, 2008, cash and cash equivalents were $44.78 million, compared
      to
      $45.53 million on December 31, 2007. Cash provided by operating activities
      totaled $23.70 million for the nine months ended September 30, 2008, up from
      $13.93 million for the corresponding nine-month period in 2007, reflecting
      improved operating results driven by our business growth.





On
      June
      25, 2008, the Company sold 3.5 million shares of the Company’s common stock, at
      a price of $14.13 per share (a total aggregate purchase price of $49,455,000),
      resulting in net cash proceeds at $46,290,743, in a transaction exempt from
      registration under the Securities Act. The offering proceeds were used to pay
      for the July acquisition of Hengda.





Beginning
      March 1, 2008, the Company is required to make semi-annual principal payments
      of
      $2,000,000 on the 2010 Notes. In the 2008 third quarter, the Company made the
      second $2,000,000 principal payment, totaling $4,000,000 as of September 30,
      2008.





In
      August
      2006, the Company’s subsidiary Harbin Tech Full signed an R&D Agreement with
      the Institute of Electrical Engineering of the Chinese Academy of Science
      (“IEECAS”). Under the R&D Agreement, Harbin Tech Full is obligated to invest
      approximately $2.19 million (of which approximately $1.46 million previously
      has
      been paid) during the period ending in early 2009. On September 8, 2006 the
      Company’s subsidiary Harbin Tech Full signed a Land Use Agreement for a plot of
      land in Shanghai. Harbin Tech Full is obligated to make an additional fee
      payment of approximately $1.27 million (the timing of which is dependent upon
      completion of certain regulatory applications and receipt of a regulatory permit
      for work commencement) as well as to invest approximately $15 million in site
      investments. As permitted by the Indenture, the Company used a portion of the
      proceeds from placement of the 2010 and 2012 Notes for such
      purposes.





On
      April
      9, 2007, the Company entered an agreement with Shelton Technology, LLC
      (“Shelton”), whereby the Company and Shelton agreed to work together through the
      Company’s newly formed, wholly-owned subsidiary, Advanced Automation Group, LLC
      (“AAG”), to design, develop and manufacture customized industrial automation
      controllers. Pursuant to the terms of the agreement, the Company is required
      to
      contribute $3,000,000 to AAG in 3 installments: $1.2 million was paid on April
      16, 2007; $800,000 was paid on July 16, 2008; and $1,000,000 is due by March
      31,
      2009.








***Cross-currency
      interest rate hedge***





The
      Company's operations are exposed to a variety of global market risks, including
      changes in foreign currency exchange rates and interest rates. These exposures
      are managed, in part, with the use of a financial derivative. The Company uses
      financial derivatives only to hedge exposures in the ordinary course of business
      and does not invest in derivative instruments for speculative
      purposes.





Effective
      April 17, 2007, the Company entered a cross-currency interest rate swap
      agreement with Merrill Lynch, effectively exchanging the LIBOR plus 3.35%
      variable rate interest payable on the $38 million principal amount of 2012
      Notes
      for a 7.2% RMB fixed interest rate. The agreement requires semi-annual payments
      on March 1 and September 1 through the maturity of the agreement on September
      1,
      2012. Merrill Lynch required the Company to deposit $1,000,000 to secure the
      agreement. The deposit may be increased to $2,500,000, if the exchange rate
      for
      Renminbi to USD falls below 6.5, and to $4,000,000, if the exchange rate falls
      below 5.5. This swap is designated and qualified as a cash flow
      hedge.





The
      fair
      value of this swap agreement on December 31, 2007 was a payable of $10,844,372,
      and on September 30, 2008 was a payable of $6,734,843. From the December 31,
      2007 to September 30, 2008, changes in fair value of the swap resulted in other
      comprehensive income of $4,109,529, net of taxes, and a decrease in liabilities.
      During the nine months ended September 30, 2008, the Company recognized $318,131
      as gain from this derivative transaction. For the nine months ended September
      30, 2008, no amount related to ineffectivness was recorded in the consolidated
      statement of income in connection with this interest rate swap.





The
      Company accounts for this swap in accordance with FAS No. 133, “Accounting for
      Derivatives Instruments and Hedging Activity,” which requires all derivatives to
      be carried on the balance sheet at fair value and to meet certain documentary
      and analytical requirements to qualify for hedge accounting treatment.
      Accordingly, changes in the fair value are reported in accumulated other
      comprehensive income, net of related income tax effects.





40
 
  ***Contractual
          Obligations***
 
 The
          Company enters into non-cancelable purchase commitments with its investors.
          As
          of September 30, 2008, and December 31, 2007, the Company was obligated
          under
          the non-cancelable commitments to purchase materials totaling to $1,756,328
          and
          $1,686,222, respectively. These commitments are short-term and expire within
          one
          year. The Company has experienced no losses on these purchase commitments
          over
          the years.


***Off-balance
      sheet arrangement***





***None.***





**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





Information
      relating to quantitative and qualitative disclosures about market risk is
      provided in the Company’s 2007 annual report on Form 10-KSB, which information
      is incorporated herein by reference. There have been no material changes in
      the
      Company’s exposure to market risk since December 31, 2007.





**Item
      4. Controls and Procedures**





**(a)
      Evaluation of Disclosure Controls and Procedures**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports filed pursuant to the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the SEC’s rules, regulations and related forms, and that
      such information is accumulated and communicated to our principal executive
      officer and principal financial officer, as appropriate, to allow timely
      decisions regarding required disclosure.





As
      of the
      end of the period covered by this report, the Company conducted an evaluation,
      under the supervision and with the participation of our principal executive
      officer and our principal financial officer of the effectiveness of the design
      and operation of our disclosure controls and procedures (as defined in Rule
      13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended
      (the
      "Exchange Act"), as of the end of the period covered by this report. Based
      on
      this evaluation, our management concluded that our disclosure controls and
      procedures are effective to ensure that information required to be disclosed
      by
      us in the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized, and reported within the time periods specified in the
      SEC's rules and forms and is accumulated and communicated to the company’s
      management, as appropriate, to allow timely decisions regarding required
      disclosure.




(b) **Changes
      in Internal Control over Financial Reporting**





The
      acquisition of Weihai Hengda Electric Motor (Group) Co. Ltd. during the quarter
      ended September 30, 2008 added five additional plants to our Company and
      increased the burden of employing adequate controls over financial reporting.
      We
      believe that the controls over financial reporting in place at Hengda at the
      time of acquisition were and remain adequate.





Except
      as
      set forth in the preceding paragraph, there have been no changes in our internal
      control over financial reporting that occurred during the nine months ended
      September 30, 2008 that have materially affected, or are reasonably likely
      to
      materially affect, the Company’s internal control over financial
      reporting.





**PART
      II. OTHER INFORMATION**





**Item
      1.**  **Legal Proceedings**




We
      are
      not currently a party to any material legal proceedings. From time to time,
      however, we may become involved in various lawsuits and legal proceedings which
      arise in the ordinary course of business.





**Item
      1A. Risk Factors**





You
      should carefully consider the risk factors described below before making an
      investment decision. If any of the following risks actually occurs, our
      business, financial condition or operating results could be materially and
      adversely affected. In such case, the trading price of our common stock could
      decline, and you may lose all or part of your investment. Additional risks
      and
      uncertainties not currently foreseeable to us may also impair our business
      operations.





**GENERAL
      RISKS RELATING TO OUR BUSINESS**





**Our
      rapid growth may strain our resources.**




Our
      revenues increased by sixty-two percent (62%) in 2007 over 2006, and seventy-one
      percent (71%) in 2006 over 2005; however, it is unlikely that we will maintain
      such growth in the long term and cannot assure any growth of our business for
      any period. Our rapid expansion will place significant strain on our management
      and our operational, accounting, and information systems. We expect that we
      will
      need to continue to improve our financial controls, operating procedures, and
      management information systems. We will also need to effectively train,
      motivate, and manage our employees. Our failure to manage our growth could
      disrupt our operations and ultimately prevent us from generating the profits
      we
      expect.





41


**Our
      debt may constrict our operations, and cash flows and capital resources may
      be
      insufficient to make required payments on our substantial indebtedness and
      future indebtedness.**





We
      have a
      substantial amount of debt. As of September 30, 2008, we had approximately
      $46
      million outstanding under our Guaranteed Senior Secured Floating Rate Notes
      (the
“Notes”) issued in August 2006, due in 2010 and 2012 (respectively, the “2010
      Notes” and the “2012 Notes”). Our substantial debt could have important
      consequences to you. For example, it could:







·
            reduce
                the availability of our cash flow to fund future working capital,
                capital
                expenditures, acquisitions and other general corporate
                purposes;




·
            limit
                our ability to obtain additional financing for working capital, capital
                expenditures, and other general corporate
                requirements;




·
            expose
                us to interest rate fluctuations because the interest rate for a
                portion
                of our debt is variable;




·
            increase
                our vulnerability to general adverse economic and industry
                conditions;




·
            require
                us to sell assets to reduce indebtedness or influence our decisions
                about
                whether to do so;




·
            restrict
                us from making strategic acquisitions or pursuing business
                opportunities;




·
            limit
                our flexibility in planning for, or reacting to, changes in our business
                and the industry in which we
                operate;




·
            limit,
                along with the financial and other restrictive covenants in our
                indebtedness, among other things, our ability to borrow additional
                funds;
                and




·
            place
                us at a competitive disadvantage compared to competitors that may
                have
                proportionately less debt.




In
      addition, our ability to make scheduled payments or refinance our obligations
      depends on our successful financial and operating performance, cash flows,
      and
      capital resources, which in turn depend upon prevailing economic conditions
      and
      certain financial, business, and other factors, many of which are beyond our
      control. If our cash flows and capital resources are insufficient to fund our
      debt obligations, we may be forced to reduce or delay capital expenditures,
      sell
      material assets or operations, obtain additional capital, restructure our debt,
      or declare bankruptcy. Furthermore, our obligations under the Notes are secured
      by our shares of Advanced Electric Motors, Inc., our Delaware subsidiary through
      which we own our electric motor business. These security interests could result
      in our loss of the business, if we default on the Notes.





To
      mitigate our exposure to volatility in interest rates and foreign currency
      exchange rates fluctuation associated with the $38 million principal amount
      of
      2012 Notes, in April 2007, the Company entered a cross-currency interest rate
      swap transaction with Merrill Lynch International. The swap, in effect, converts
      the LIBOR plus 3.35% variable interest rate on the 2012 Notes to a 7.2% RMB
      fixed interest rate. The Company uses this derivative instrument only to hedge
      exposures in the ordinary business course and does not invest in derivative
      instruments for speculative purposes.





The
      Company management watches closely and measures the risk of the swap on a
      regular basis, which includes effectiveness analysis and pricing model
      discussion with Merrill Lynch that provides market value pricing quarterly.
      The
      Company is aware that, under recently adopted Statement of Financial Standards
      (“FAS”) No. 157, *Fair
      Value Measurements* , there
      is risk inherent in relying on only one technique to measure fair value of
      financial derivative liability and risk inherent in the inputs to the valuation
      technique.




42


**Covenants
      in our debt instruments restrict or prohibit our ability to engage in or enter
      into a variety of transactions.**





The
      indenture governing our Notes contains various covenants that may limit our
      discretion in operating our business. In particular, we are limited in our
      ability to merge, consolidate or transfer substantially all of our assets,
      issue
      preferred stock of subsidiaries and create liens on our assets to secure debt.
      In addition, if there is default, and we do not maintain certain financial
      covenants or we do not maintain borrowing availability in excess of certain
      pre-determined levels, we may be unable to incur additional indebtedness, make
      restricted payments (including paying cash dividends on our capital stock)
      or
      redeem or repurchase our capital stock.




The
      indenture governing our Notes requires us to maintain certain financial ratios
      and limits our ability to make capital expenditures. These covenants and ratios
      could have an adverse effect on our business by limiting our ability to take
      advantage of financing, merger and acquisition or other corporate opportunities
      and to fund our operations.





**Our
      success depends on our management team and other key personnel, the loss of
      any
      of whom could disrupt our business operations.**




Our
      future success will depend in substantial part on the continued service of
      the
      members of our senior management. The loss of the services of one or more of
      our
      key personnel could impede implementation of our business plan and result in
      reduced profitability. We do not carry key person life insurance on any of
      our
      officers or employees. Our future success will also depend on the continued
      ability to attract, retain and motivate highly qualified technical sales and
      marketing customer support.




Because
      of the rapid growth of the economy in China, competition for qualified personnel
      is intense. We cannot assure you that we will be able to retain our key
      personnel or that we will be able to attract, assimilate or retain qualified
      personnel in the future.





**We
      depend on a few key customers, the loss of any of which could cause a
      significant decline in our revenues.**




Three
      major customers accounted for 37% for the nine-months ended September 30, 2008.
      Five major customers accounted for 72% of net revenue for the nine months ended
      September 30, 2007. The loss of any of our major customers, or a significant
      reduction in sales to any such customers, would adversely affect our
      profitability.





**We
      depend on the supply of raw materials and key component parts, and any adverse
      changes in such supply or the costs of raw materials may adversely affect our
      operations.**




Two
      major
      vendors provided approximately 37% of the Company’s purchases of raw materials
      for the nine months ended September 30, 2008. Five major vendors provided
      approximately 80% of the Company’s purchases of raw materials for the nine
      months ended September 30, 2007. Any material change in the spot and forward
      rates could have a material adverse effect on the cost of our raw materials
      and
      on our operations. In addition, if we need alternative sources for key component
      parts for any reason, these component parts may not be immediately available
      to
      us. If alternative suppliers are not immediately available, we will have to
      identify and qualify alternative suppliers, and production of these components
      may be delayed. We may not be able to find an adequate alternative supplier
      in a
      reasonable time period or on commercially acceptable terms, if at all. Shipments
      of affected products have been limited or delayed as a result of such problems
      in the past, and similar problems could occur in the future. An inability to
      obtain our key source supplies for the manufacture of our products might require
      us to delay shipments of products, harm customer relationships or force us
      to
      curtail or cease operations.





**We
      may not be able to adequately protect and maintain our intellectual
      property.**




Our
      success will depend on our ability to continue to develop and market electric
      motor products. We have been granted 12 patents in China relating to linear
      motor and automobile specialty micro-motor applications. No assurance can be
      given that such patents will not be challenged, invalidated, infringed or
      circumvented, or that such intellectual property rights will provide a
      competitive advantage to us. Also, litigation may be necessary to enforce our
      intellectual property rights or determine the validity and scope of the
      proprietary rights of others. The outcome of such potential litigation may
      not
      be in our favor and any success in litigation may not be able to adequately
      protect our rights. Such litigation may be costly and divert management
      attention away from our business. An adverse determination in any such
      litigation would impair our intellectual property rights and may harm our
      business, prospects and reputation. Enforcement of judgments in China is
      uncertain and even if we are successful in such litigation it may not provide
      us
      with an effective remedy.




**We
      do not anticipate paying cash dividends on our common
      stock.**




We
      have
      never paid cash dividends on our common stock and do not anticipate paying
      cash
      dividends in the foreseeable future. Presently, we intend to retain all of
      our
      earnings, if any, to finance development and expansion of our business. Debt
      covenants and PRC capital and currency regulations may also limit our ability
      to
      pay dividends.





**Our
      directors and officers control a majority of our common stock and, as a result,
      they may exercise voting control and be able to take actions that may be adverse
      to your interests.**





Our
      directors and executive officers, directly or through entities that they
      control, currently beneficially own, as a group, approximately 51.2% of our
      issued and outstanding common stock as of September 30, 2008. This significant
      concentration of share ownership may adversely affect the trading price of
      our
      common stock because investors often perceive a disadvantage in owning shares
      in
      a company with one or several controlling stockholders. Furthermore, our
      directors and officers, as a group, have the ability to significantly influence
      or control the outcome of all matters requiring stockholder approval, including
      the election of directors and approval of significant corporate transactions,
      such as mergers, consolidations or the sale of substantially all of our assets.
      This concentration of ownership may have the effect of delaying or preventing
      a
      change of control, including a merger, consolidation or other business
      combination involving us, or discouraging a potential acquirer from making
      a
      tender offer or otherwise attempting to obtain control.





43





**RISKS
      RELATING TO DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF
      CHINA**





**China’s
      economic policies could adversely affect our business.**





Substantially
      all of our assets are located in China and substantially all of our revenue
      is
      derived from our operations in China. Accordingly, our results of operations
      and
      prospects are subject, to a significant extent, to economic, political and
      legal
      developments in China.





While
      China’s economy has experienced significant growth in the past 20 years, it has
      been uneven, both geographically and among various sectors of the economy.
      The
      Chinese government has implemented various measures to encourage economic growth
      and guide the allocation of resources. Some of these measures benefit the
      overall economy of China, but may also have a negative effect on us. For
      example, our operating results and financial condition may be adversely affected
      by government control over capital investments or changes in tax
      regulations.





The
      economy of China has been changing from a planned economy to a more
      market-oriented economy. In recent years the Chinese government has implemented
      measures emphasizing market forces for economic reform, reduction of state
      ownership of productive assets, and establishment of corporate governance in
      business enterprises; however, a substantial portion of productive assets in
      China are still owned by the Chinese government. In addition, the Chinese
      government continues to play a significant role in regulating industry
      development by imposing industrial policies. It also exercises significant
      control over China’s economic growth through the allocation of resources,
      controlling payment of foreign currency-denominated obligations, setting
      monetary policy, and providing preferential treatment to particular industries
      or companies.





**If preferential
      tax concessions granted by the PRC government change or expire, our financial
      results and results of operations would be materially and adversely
      affected.**




Our
      results of operation may be adversely affected by changes to or expiration
      of
      preferential tax concessions that one of our Chinese subsidiaries, Harbin Tech
      Full Electric Co., Ltd., (“Harbin Tech Full”) currently enjoys. The statutory
      tax rate generally applicable to domestic Chinese companies was 33% before
      January 1, 2008. On January 1, 2008, the new Chinese Enterprise Income Tax
      (“EIT”) law replaced the existing laws for Domestic Enterprises (“DES”) and
      Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% is now
      applicable to both DES and FIEs. A reduced rate of 10% may be possible for
      productive foreign investment enterprises in the Economic and Technological
      Development Zones and for enterprises engaged in production or business
      operations in the Special Economic Zones. As a result of preferential tax rate
      incentives, our operations under Harbin Tech Full have been subject to
      relatively lower tax liabilities. The estimated tax savings for the nine months
      ended September 30, 2008 and 2007 without preferential tax treatment amounted
      to
      $4,652,412 and $7,367,542, respectively. The estimated tax savings for the
      three
      months ended September 30, 2008 and 2007 amounted to $1,482,029and $2,032,231,
      respectively.





Tax
      laws
      in China are subject to interpretations by relevant tax authorities. The
      preferential tax treatment may not remain in effect or may change, in which
      case
      we may be required to pay the higher income tax rate generally applicable to
      Chinese companies, or such other rate as is required by the laws of
      China.





**Fluctuations
      in the value of the RMB could materially affect our financial condition and
      results of operations.**




The
      value
      of RMB against the U.S. dollar and other currencies may fluctuate and is
      affected by, among other things, changes in political and economic conditions.
      Our revenues and costs are mostly denominated in RMB. Any significant
      fluctuation in value of RMB may materially and adversely affect our cash flows,
      revenues, earnings and financial position. For example, an appreciation of
      RMB
      against the U.S. dollar would make any new RMB denominated investments or
      expenditures more costly to us, to the extent that we need to convert U.S.
      dollars into RMB for such purposes. In addition, the depreciation of significant
      U.S. dollar denominated assets could result in a charge to our income statement
      and a reduction in the value of these assets.





**We
      are subject to environmental laws and regulations in the
      PRC.**




We
      are
      subject to environmental laws and regulations in the PRC. Any failure by us
      to
      comply fully with such laws and regulations will result in us being subject
      to
      penalties and fines or being required to pay damages. Although we believe we
      are
      currently in compliance with the environmental regulations in all material
      respects, any change in the regulations may require us to acquire equipment
      or
      incur additional capital expenditure or costs in order to comply with such
      regulations. Our profits will be adversely affected if we are unable to pass
      on
      such additional costs to our customers.





44


**We
      may have difficulty establishing adequate management, legal and financial
      controls in the PRC.**





The
      PRC
      historically has been deficient in Western style management and financial
      reporting concepts and practices, as well as in modern banking, computer and
      other control systems. We may have difficulty in hiring and retaining a
      sufficient number of qualified employees to work in the PRC. As a result of
      these factors, we may experience difficulty in establishing management, legal
      and financial controls, collecting financial data and preparing financial
      statements, books of account and corporate records and instituting business
      practices that meet Western standards.





**It
      will be extremely difficult to acquire jurisdiction and enforce liabilities
      against our officers, directors and assets based in the
      PRC.**





Because
      our executive officers and several of our directors, including our chairman
      of
      the Board of Directors, are Chinese citizens, it may be difficult, if not
      impossible, to acquire jurisdiction over these persons in the event a lawsuit
      is
      initiated against us and/or our officers and directors by a stockholder or
      group
      of stockholders in the United States. Also, because the majority of our assets
      are located in the PRC, it would also be extremely difficult to access those
      assets to satisfy an award entered against us in the U.S. court.





**The
      legal system in China has inherent uncertainties that may limit the legal
      protections available in the event of any claims or disputes with third
      parties.**





The
      legal
      system in China is based on written statutes. Prior court decisions may be
      cited
      for reference but have limited precedential value. Since 1979, the central
      government has promulgated laws and regulations dealing with economic matters
      such as foreign investment, corporate organization and governance, commerce,
      taxation and trade. As China’s foreign investment laws and regulations are
      relatively new and the legal system is still evolving, the interpretation of
      many laws, regulations and rules is not always uniform and enforcement of these
      laws, regulations and rules involve uncertainties, which may limit the remedies
      available in the event of any claims or disputes with third parties. In
      addition, any litigation in China may be protracted and result in substantial
      costs and diversion of resources and management attention.








**Item
      2.**  **Unregistered Sales of Equity Securities and Use of
      Proceeds**





As
      reported on a current report on Form 8-K dated June 24, 2008, we sold 3.5
      million shares of the our common stock, par value $0.00001 per share (the
“Shares”) at $14.13 per share for a total aggregate purchase price of
      $49,455,000 resulting in net proceeds of $46,290,743. The proceeds were used
      to
      pay for the acquisition of Weihai Hengda Electric Motor (Group) Co. Ltd.. The
      sells were made only to accredited investors, without any general solicitation
      and, accordingly, were exempt from Securities Act registration pursuant to
      Section 4(2) thereof.





**Item
      3.**  **Defaults upon Senior Securities**




None.





**Item
      4.**  **Submission of Matters to a Vote of Securities Holders**




(a)
              The
                  Annual Meeting of Shareholders of Harbin Electric, Inc. was held
                  on
                  September 26, 2008.


(b)
              Seven
                  directors were elected: Tianfu Yang (Chairman of the Board), Lanxiang
                  Gao,
                  Ching Chuen Chan, Patrick McManus, David Gatton, Feng Bai, and
                  Yunyue
                  Ye.





(c)
              Shareholders
                  ratified the appointment of Moore Stephens Wurth Frazer and Torbet,
                  LLP as
                  the Company’s independent registered public accounting firm for the year
                  ended December 31, 2008.





**Item
      5.**  **Other Information**





None.





**Item
      6.**  **Exhibits.**


The
      exhibits listed on the Exhibit Index are being furnished with this
      report.





45


**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.




**Harbin
                Electric, Inc.**Date:
                November 10, 2008
            By:
            /s/ Tianfu
                YangTianfu
                YangChief
                Executive Officer, Director and Chairman of the Board
              (Principal
                Executive Officer)




Date:
                November 10, 2008
            By:
            /s/ Zedong
                XuZedong
                XuChief
                Financial Officer
              (Principal
                Accounting Officer)





46


**EXHIBIT
      INDEX**





Exhibits:






**Exhibit Number**
            
            **Description**
            
            **Method of Filing**10.1
            
            Purchase
                Agreement, dated June 24, 2008, by and among the Company and the
                investors
                party thereto.
            
            Filed
                as Exhibit 10.1 to the current report on Form 8-K filed with the
                Commission on June 26, 2008 and incorporated herein by
                reference.10.2
            
            Registration
                Rights Agreement, dated June 24, 2008, by and among the Company and
                the
                investors party thereto.
            
            Filed
                as Exhibit 10.2 to the current report on Form 8-K filed with the
                Commission on June 26, 2008 and incorporated herein by
                reference.10.3
            
            Equity
                and Assets Transfer Agreement, dated July 10, 2008, by and between
                Harbin
                Tech Full Electric Co. Ltd., Weihai Hengda Electric Motor (Group)
                Co.
                Ltd., Wendeng Second Electric Motor Factory, the Committee of Labor
                Union
                of Wendeng Second Electric Motor Factory, the People’s Government of
                Zhangjiachan Town and Wendeng County.
            
            Filed
                as Exhibit 10.1 to the current report on Form 8-K filed with the
                Commission on July 11, 2008 and incorporated herein by
                reference.31.1
            
            Certification
                by the Chief Executive Officer pursuant to Rule 13a-14(a) or
                15d-14(a)
            
            Filed
                herewith as Exhibit 31.1.31.2
            
            Certification
                by the Chief Financial Officer pursuant to Rule 13a-14(a) or
                15d-14(a)
            
            Filed
                herewith as Exhibit 31.2.32.1
            
            Certification
                of the Chief Executive Officer and the Chief Financial Officer pursuant
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002
            
            Filed
                herewith as Exhibit 32.1.






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